ITEM 1.
|
FINANCIAL STATEMENTS.
|
CBAK ENERGY TECHNOLOGY, INC. AND
SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
F-1
CBAK Energy Technology, Inc. and Subsidiaries
Condensed Consolidated balance sheets
As of December 31, 2016
and March 31, 2017
(Unaudited)
(In US$)
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
Note
|
|
|
2016
|
|
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
$
|
408,713
|
|
$
|
440,228
|
|
Pledged deposits
|
2
|
|
|
4,278,144
|
|
|
4,179,151
|
|
Trade accounts and bills receivable, net
|
3
|
|
|
2,468,387
|
|
|
5,989,712
|
|
Inventories
|
4
|
|
|
17,094,922
|
|
|
17,311,511
|
|
Prepayments and other receivables
|
5
|
|
|
6,675,351
|
|
|
7,142,376
|
|
Prepaid land use rights, current portion
|
9
|
|
|
161,790
|
|
|
163,106
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
31,087,307
|
|
|
35,226,084
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
7
|
|
|
20,010,903
|
|
|
21,442,562
|
|
Construction in progress
|
8
|
|
|
33,457,043
|
|
|
33,054,907
|
|
Prepaid land use rights, non-current
|
9
|
|
|
7,536,733
|
|
|
7,557,225
|
|
Intangible assets, net
|
10
|
|
|
21,344
|
|
|
20,872
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
$
|
92,113,330
|
|
$
|
97,301,650
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Trade accounts and bills payable
|
|
|
$
|
15,580,655
|
|
$
|
14,720,051
|
|
Short-term bank loans
|
11
|
|
|
1,439,947
|
|
|
1,451,653
|
|
Other short-term loans
|
12
|
|
|
10,524,778
|
|
|
16,035,801
|
|
Accrued expenses and other payables
|
13
|
|
|
19,382,593
|
|
|
19,324,231
|
|
Payables to former subsidiaries, net
|
6
|
|
|
2,488,859
|
|
|
5,308,384
|
|
Deferred government grants, current
|
14
|
|
|
142,400
|
|
|
143,558
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
49,559,232
|
|
|
56,983,678
|
|
|
|
|
|
|
|
|
|
|
Long-term bank loans
|
11
|
|
|
18,258,528
|
|
|
18,406,956
|
|
Deferred government grants, non-current
|
14
|
|
|
4,556,861
|
|
|
4,558,016
|
|
Long term tax payable
|
15
|
|
|
7,061,140
|
|
|
6,510,805
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
79,435,761
|
|
|
86,459,455
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' (deficit) equity
|
|
|
|
|
|
|
|
|
Common stock $0.001 par value; 500,000,000 authorized ;
19,744,675 issued and 19,600,469 outstanding as of December 31, 2016;
19,856,174 issued and 19,711,968 outstanding as of March 31, 2017
|
|
|
|
19,745
|
|
|
19,857
|
|
Donated shares
|
|
|
|
14,101,689
|
|
|
14,101,689
|
|
Additional paid-in capital
|
|
|
|
145,353,067
|
|
|
145,605,443
|
|
Statutory reserves
|
|
|
|
1,230,511
|
|
|
1,230,511
|
|
Accumulated deficit
|
|
|
|
(141,999,372
|
)
|
|
(144,067,588
|
)
|
Accumulated other comprehensive loss
|
|
|
|
(1,961,461
|
)
|
|
(1,981,107
|
)
|
|
|
|
|
16,744,179
|
|
|
14,908,805
|
|
Less: Treasury shares
|
|
|
|
(4,066,610
|
)
|
|
(4,066,610
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
12,677,569
|
|
|
10,842,195
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholder's equity
|
|
|
$
|
92,113,330
|
|
$
|
97,301,650
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-2
CBAK Energy Technology, Inc. and Subsidiaries
Condensed Consolidated statements of operations and comprehensive
loss
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
|
|
|
|
Three months ended March 31,
|
|
|
Note
|
|
|
2016
|
|
|
2017
|
|
Net revenues
|
21
|
|
$
|
3,198,913
|
|
$
|
3,716,144
|
|
Cost of revenues
|
|
|
|
(3,298,207
|
)
|
|
(4,133,321
|
)
|
Gross loss
|
|
|
|
(99,294
|
)
|
|
(417,177
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
|
|
(360,540
|
)
|
|
(430,344
|
)
|
Sales and marketing expenses
|
|
|
|
(299,084
|
)
|
|
(234,880
|
)
|
General and administrative expenses
|
|
|
|
(1,171,573
|
)
|
|
(984,476
|
)
|
Total operating expenses
|
|
|
|
(1,831,197
|
)
|
|
(1,649,700
|
)
|
Operating loss
|
|
|
|
(1,930,491
|
)
|
|
(2,066,877
|
)
|
Finance expenses, net
|
|
|
|
(37,192
|
)
|
|
(2,728
|
)
|
Other income, net
|
|
|
|
7,284
|
|
|
1,389
|
|
Loss before income tax
|
|
|
|
(1,960,399
|
)
|
|
(2,068,216
|
)
|
Income tax credit
|
15
|
|
|
57,241
|
|
|
-
|
|
Net loss
|
|
|
|
(1,903,158
|
)
|
|
(2,068,216
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
144,655
|
|
|
(19,646
|
)
|
Comprehensive loss
|
|
|
$
|
(1,758,503
|
)
|
$
|
(2,087,862
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share
|
17
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
$
|
(0.11
|
)
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock:
|
17
|
|
|
|
|
|
|
|
Basic
|
|
|
|
17,229,432
|
|
|
19,856,778
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-3
CBAK Energy Technology, Inc. and Subsidiaries
Condensed Consolidated statements of changes in shareholders equity
For the three months
ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number
of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
stock issued
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
Treasury shares
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Donated
|
|
|
paid-in
|
|
|
Statutory
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
Number
|
|
|
|
|
|
shareholders
|
|
|
|
of
shares
|
|
|
Amount
|
|
|
shares
|
|
|
capital
|
|
|
reserves
|
|
|
deficit
|
|
|
loss
|
|
|
of
shares
|
|
|
Amount
|
|
|
equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
January
1, 2016
|
|
17,289,699
|
|
$
|
17,290
|
|
$
|
14,101,689
|
|
$
|
138,405,110
|
|
$
|
1,230,511
|
|
$
|
(129,285,454
|
)
|
$
|
(979,048
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
19,423,488
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,903,158
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,903,158
|
)
|
Share-based compensation for
employee and director stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
321,355
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
321,355
|
|
Common stock issued to employees and
directors for stock awards
|
|
47,501
|
|
|
47
|
|
|
-
|
|
|
(47
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
144,655
|
|
|
-
|
|
|
-
|
|
|
144,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March
31, 2016
|
|
17,337,200
|
|
$
|
17,337
|
|
$
|
14,101,689
|
|
$
|
138,726,418
|
|
$
|
1,230,511
|
|
$
|
(131,188,612
|
)
|
$
|
(834,393
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
17,986,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January
1, 2017
|
|
19,744,675
|
|
$
|
19,745
|
|
$
|
14,101,689
|
|
$
|
145,353,067
|
|
$
|
1,230,511
|
|
$
|
(141,999,372
|
)
|
$
|
(1,961,461
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
12,677,569
|
|
Net loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,068,216
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,068,216
|
)
|
Share-based compensation for
employee and director stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
252,488
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
252,488
|
|
Common stock issued to employees and
directors for stock awards
|
|
111,499
|
|
|
112
|
|
|
-
|
|
|
(112
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Foreign currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(19,646
|
)
|
|
-
|
|
|
-
|
|
|
(19,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March
31, 2017
|
|
19,856,174
|
|
$
|
19,857
|
|
$
|
14,101,689
|
|
$
|
145,605,443
|
|
$
|
1,230,511
|
|
$
|
(144,067,588
|
)
|
$
|
(1,981,107
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
10,842,195
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-4
CBAK Energy Technology, Inc. and
subsidiaries
Condensed Consolidated statements of cash
flows
For the three months ended March 31, 2016 and
2017
(Unaudited)
(In US$)
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net loss
|
$
|
(1,903,158
|
)
|
$
|
(2,068,216
|
)
|
Adjustments to reconcile net loss to net cash
used in operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
272,548
|
|
|
297,406
|
|
(Reversal of) Provision for doubtful debts
|
|
(39,254
|
)
|
|
9,105
|
|
Write-down of inventories
|
|
96,910
|
|
|
150,156
|
|
Share-based compensation
|
|
321,355
|
|
|
252,488
|
|
Deferred tax assets
|
|
(56,932
|
)
|
|
-
|
|
Exchange gain
|
|
(124,185
|
)
|
|
(142,343
|
)
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
Trade accounts and bills
receivable
|
|
(2,120,972
|
)
|
|
(3,510,465
|
)
|
Inventories
|
|
(168,248
|
)
|
|
(227,766
|
)
|
Prepayments and other
receivables
|
|
(361,320
|
)
|
|
(412,770
|
)
|
Trade accounts
and bills payable
|
|
2,691,637
|
|
|
(987,292
|
)
|
Accrued expenses and other
payables
|
|
4,009
|
|
|
123,459
|
|
Income taxes
payable
|
|
-
|
|
|
(607,755
|
)
|
Trade receivable from and
payables to former subsidiaries
|
|
4,762,842
|
|
|
2,805,278
|
|
Net cash provided by (used
in) operating activities
|
|
3,375,232
|
|
|
(4,318,715
|
)
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Decrease in pledged deposits
|
|
92,457
|
|
|
133,775
|
|
Purchases of property, plant and equipment
and construction in progress
|
|
(3,027,974
|
)
|
|
(1,213,300
|
)
|
Net cash used in investing
activities
|
|
(2,935,517
|
)
|
|
(1,079,525
|
)
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
Deposits from shareholders
|
|
-
|
|
|
2,032,373
|
|
Proceeds from bank borrowings
|
|
481,283
|
|
|
-
|
|
Borrowings from related parties
|
|
529,707
|
|
|
1,869,782
|
|
Borrowings from unrelated parties
|
|
88,961
|
|
|
1,524,280
|
|
Repayment of borrowings from
unrelated parties
|
|
(77,333
|
)
|
|
-
|
|
Net cash provided by financing activities
|
|
1,022,618
|
|
|
5,426,435
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
and cash equivalents
|
|
51,853
|
|
|
3,320
|
|
Net increase in cash and
cash equivalents
|
|
1,514,186
|
|
|
31,515
|
|
Cash and cash equivalents at the beginning
of period
|
|
80,711
|
|
|
408,713
|
|
Cash and cash equivalents
at the end of period
|
$
|
1,594,897
|
|
$
|
440,228
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
Transfer of construction in progress to
property, plant and equipment
|
$
|
-
|
|
$
|
1,560,897
|
|
Cash paid during the period
for:
|
|
|
|
|
|
|
Income taxes
|
$
|
-
|
|
$
|
607,755
|
|
Interest, net of amounts
capitalized
|
$
|
-
|
|
$
|
-
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-5
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
1. Principal Activities, Basis of Presentation
and Organization
Principal Activities
On January 10, 2017, China BAK Battery, Inc. (China BAK or
the "Company") filed Articles of Merger with the Secretary of State of Nevada to
effectuate a merger between the Company and the Companys newly formed, wholly
owned subsidiary, CBAK Merger Sub, Inc. (the Merger Sub). According to the
Articles of Merger, effective January 16, 2017, the Merger Sub merged with and
into the Company with the Company being the surviving entity (the "Merger"). As
permitted by Chapter 92A.180 of Nevada Revised Statutes, the sole purpose of the
Merger was to effect a change of the Company's name.
Effective January 16, 2017, the name of the Company was changed
to CBAK Energy Technology, Inc. The trading symbol of the Company's common stock
remains as "CBAK".
On January 16, 2017, the Board of Directors of the Company
approved a change in the Companys fiscal year end from September 30 to December
31. Accordingly, the Companys next Annual Report on Form 10-K will be for the
fiscal year ending December 31, 2017. With this fiscal year end change, the
Company files a transition report on Form 10-Q for the period from October 1,
2016 through December 31, 2016.
China BAK is a corporation formed in the State of Nevada on
October 4, 1999 as Medina Copy, Inc. The Company changed its name to Medina
Coffee, Inc. on October 6, 1999 and subsequently changed its name to China BAK
Battery, Inc. on February 14, 2005. China BAK and its subsidiaries (hereinafter,
collectively referred to as the Company) are principally engaged in the
manufacture, commercialization and distribution of a wide variety of standard
and customized lithium ion (known as "Li-ion" or "Li-ion cell") high power
rechargeable batteries. Prior to the disposal of BAK International Limited (BAK
International) and its subsidiaries (see below), the batteries produced by the
Company were for use in cellular telephones, as well as various other portable
electronic applications, including high-power handset telephones, laptop
computers, power tools, digital cameras, video camcorders, MP3 players, electric
bicycles, hybrid/electric vehicles, and general industrial applications. After
the disposal of BAK International and its subsidiaries on June 30, 2014, the
Company will focus on the manufacture, commercialization and distribution of
high power lithium ion rechargeable batteries for use in cordless power tools,
light electric vehicles, hybrid electric vehicles, electric cars, electric
busses, uninterruptable power supplies and other high power applications.
The shares of the Company traded in the over-the-counter market
through the Over-the-Counter Bulletin Board from 2005 until May 31, 2006, when
the Company obtained approval to list its common stock on The NASDAQ Global
Market, and trading commenced that same date under the symbol "CBAK".
Basis of Presentation and Organization
On November 6, 2004, BAK International, a non-operating holding
company that had substantially the same shareholders as Shenzhen BAK Battery
Co., Ltd (Shenzhen BAK), entered into a share swap transaction with the
shareholders of Shenzhen BAK for the purpose of the subsequent reverse
acquisition of the Company. The share swap transaction between BAK International
and the shareholders of Shenzhen BAK was accounted for as a reverse acquisition
of Shenzhen BAK with no adjustment to the historical basis of the assets and
liabilities of Shenzhen BAK.
On January 20, 2005, the Company completed a share swap
transaction with the shareholders of BAK International. The share swap
transaction, also referred to as the reverse acquisition of the Company, was
consummated under Nevada law pursuant to the terms of a Securities Exchange
Agreement entered by and among China BAK, BAK International and the shareholders
of BAK International on January 20, 2005. The share swap transaction has been
accounted for as a capital-raising transaction of the Company whereby the
historical financial statements and operations of Shenzhen BAK are consolidated
using historical carrying amounts.
Also on January 20, 2005, immediately prior to consummating the
share swap transaction, BAK International executed a private placement of its
common stock with unrelated investors whereby it issued an aggregate of
1,720,087 shares of common stock for gross proceeds of $17,000,000. In
conjunction with this financing, Mr. Xiangqian Li, the Chairman and Chief
Executive Officer of the Company (Mr. Li), agreed to place 435,910 shares of
the Company's common stock owned by him into an escrow account pursuant to an
Escrow Agreement dated January 20, 2005 (the Escrow Agreement). Pursuant to
the Escrow Agreement, 50% of the escrowed shares were to be released to the
investors in the private placement if audited net income of the Company for the
fiscal year ended September 30, 2005 was not at least $12,000,000, and the
remaining 50% was to be released to investors in the private placement if
audited net income of the Company for the fiscal year ended September 30, 2006
was not at least $27,000,000. If the audited net income of the Company for the
fiscal years ended September 30, 2005 and 2006 reached the above-mentioned
targets, the 435,910 shares would be released to Mr. Li in the amount of 50%
upon reaching the 2005 target and the remaining 50% upon reaching the 2006
target.
F-6
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
1. Principal Activities, Basis of Presentation and
Organization
(continued)
Basis of Presentation and Organization
(continued)
Under accounting principles generally accepted in the United
States of America (US GAAP), escrow agreements such as the one established by
Mr. Li generally constitute compensation if, following attainment of a
performance threshold, shares are returned to a company officer. The Company
determined that without consideration of the compensation charge, the
performance thresholds for the year ended September 30, 2005 would be achieved.
However, after consideration of a related compensation charge, the Company
determined that such thresholds would not have been achieved. The Company also
determined that, even without consideration of a compensation charge, the
performance thresholds for the year ended September 30, 2006 would not be
achieved.
While the 217,955 escrow shares relating to the 2005
performance threshold were previously released to Mr. Li, Mr. Li executed a
further undertaking on August 21, 2006 to return those shares to the escrow
agent for the distribution to the relevant investors. However, such shares were
not returned to the escrow agent, but, pursuant to a Delivery of Make Good
Shares, Settlement and Release Agreement between the Company, BAK International
and Mr. Li entered into on October 22, 2007 (the Li Settlement Agreement),
such shares were ultimately delivered to the Company as described below. Because
the Company failed to satisfy the performance threshold for the fiscal year
ended September 30, 2006, the remaining 217,955 escrow shares relating to the
fiscal year 2006 performance threshold were released to the relevant investors.
As Mr. Li has not retained any of the shares placed into escrow, and as the
investors party to the Escrow Agreement are only shareholders of the Company and
do not have and are not expected to have any other relationship to the Company,
the Company has not recorded a compensation charge for the years ended September
30, 2005 and 2006.
At the time the escrow shares relating to the 2006 performance
threshold were transferred to the investors in fiscal year 2007, the Company
should have recognized a credit to donated shares and a debit to additional
paid-in capital, both of which are elements of shareholders equity. This entry
is not material because total ordinary shares issued and outstanding, total
shareholders equity and total assets do not change; nor is there any impact on
income or earnings per share. Therefore, previously filed consolidated financial
statements for the fiscal year ended September 30, 2007 will not be restated.
This share transfer has been reflected in these financial statements by
reclassifying the balances of certain items as of October 1, 2007. The balances
of donated shares and additional paid-in capital as of October 1, 2007 were
credited and debited by $7,955,358 respectively, as set out in the consolidated
statements of changes in shareholders equity.
In November 2007, Mr. Li delivered the 217,955 shares related
to the 2005 performance threshold to BAK International pursuant to the Li
Settlement Agreement; BAK International in turn delivered the shares to the
Company. Such shares (other than those issued to investors pursuant to the 2008
Settlement Agreements, as described below) are now held by the Company. Upon
receipt of these shares, the Company and BAK International released all claims
and causes of action against Mr. Li regarding the shares, and Mr. Li released
all claims and causes of action against the Company and BAK International
regarding the shares. Under the terms of the Li Settlement Agreement, the
Company commenced negotiations with the investors who participated in the
Companys January 2005 private placement in order to achieve a complete
settlement of BAK Internationals obligations (and the Companys obligations to
the extent it has any) under the applicable agreements with such investors.
Beginning on March 13, 2008, the Company entered into
settlement agreements (the 2008 Settlement Agreements) with certain investors
in the January 2005 private placement. Since the other investors have never
submitted any claims regarding this matter, the Company did not reach any
settlement with them.
Pursuant to the 2008 Settlement Agreements, the Company and the
settling investors have agreed, without any admission of liability, to a
settlement and mutual release from all claims relating to the January 2005
private placement, including all claims relating to the escrow shares related to
the 2005 performance threshold that had been placed into escrow by Mr. Li, as
well as all claims, including claims for liquidated damages relating to
registration rights granted in connection with the January 2005 private
placement. Under the 2008 Settlement Agreement, the Company has made settlement
payments to each of the settling investors of the number of shares of the
Companys common stock equivalent to 50% of the number of the escrow shares
related to the 2005 performance threshold these investors had claimed; aggregate
settlement payments as of June 30, 2015 amounted to 73,749 shares. Share
payments to date have been made in reliance upon the exemptions from
registration provided by Section 4(2) and/or other applicable provisions of the
Securities Act of 1933, as amended. In accordance with the 2008 Settlement
Agreements, the Company filed a registration statement covering the resale of
such shares which was declared effective by the SEC on June 26, 2008.
Pursuant to the Li Settlement Agreement, the 2008 Settlement
Agreements and upon the release of the 217,955 escrow shares relating to the
fiscal year 2006 performance threshold to the relevant investors, neither Mr. Li
or the Company have any obligations to the investors who participated in the
Companys January 2005 private placement relating to the escrow shares.
F-7
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
1. Principal Activities, Basis of Presentation and
Organization
(continued)
Basis of Presentation and Organization
(continued)
As of September 30, 2016, the Company had not received any
claim from the other investors who have not been covered by the 2008 Settlement
Agreements in the January 2005 private placement.
As the Company has transferred the 217,955 shares related to
the 2006 performance threshold to the relevant investors in fiscal year 2007 and
we also have transferred 73,749 shares relating to the 2005 performance
threshold to the investors who had entered the 2008 Settlement Agreements with
us in fiscal year 2008, pursuant to Li Settlement Agreement and 2008
Settlement Agreements, neither Mr. Li nor the Company had any remaining
obligations to those related investors who participated in the Companys January
2005 private placement relating to the escrow shares.
On August 14, 2013, Dalian BAK Trading Co., Ltd (Dalian BAK
Trading) was established as a wholly owned subsidiary of China BAK Asia Holding
Limited (BAK Asia) with a registered capital of $500,000 (Note 19(i)).
Pursuant to Dalian BAK Tradings articles of association and relevant PRC
regulations, BAK Asia was required to contribute the capital to Dalian BAK
Trading on or before August 14, 2015. Up to the date of this report, the Company
has contributed $100,000 to Dalian BAK Trading in cash.
On December 27, 2013, Dalian BAK Power Battery Co., Ltd
(Dalian BAK Power) was established as a wholly owned subsidiary of BAK Asia
with a registered capital of $30,000,000 (Note 19(i)). Pursuant to Dalian BAK
Powers articles of association and relevant PRC regulations, BAK Asia was
required to contribute the capital to Dalian BAK Power on or before December 27,
2015. Up to the date of this report, the Company has contributed $20,504,004 to
Dalian BAK Power through injection of a series of patents and cash of
$15,504,004. On April and May 2017, the Dalian BAK Power received $9,495,974 injected
from BAK Asia.
The Companys condensed consolidated financial statements have
been prepared under US GAAP.
These condensed consolidated financial statements are
unaudited. In the opinion of management, all adjustments and disclosures
necessary for a fair presentation of these condensed consolidated financial
statements, which are of a normal and recurring nature, have been included. The
results reported in the condensed consolidated financial statements for any
interim periods are not necessarily indicative of the results that may be
reported for the entire year. The following (a) condensed consolidated balance
sheet as of September 30, 2016, which was derived from the Companys audited
financial statements, and (b) the unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with US
GAAP have been condensed or omitted pursuant to those rules and regulations,
though the Company believes that the disclosures made are adequate to make the
information not misleading. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying footnotes of the Company for the year ended
September 30, 2016.
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. This basis of accounting differs in certain
material respects from that used for the preparation of the books of account of
the Companys principal subsidiaries, which are prepared in accordance with the
accounting principles and the relevant financial regulations applicable to
enterprises with limited liability established in the PRC or Hong Kong. The
accompanying consolidated financial statements reflect necessary adjustments not
recorded in the books of account of the Company's subsidiaries to present them
in conformity with US GAAP.
After the disposal of BAK International Limited and its
subsidiaries, namely Shenzhen BAK, Shenzhen BAK Power Battery Co., Ltd (formerly
BAK Battery (Shenzhen) Co., Ltd.) (BAK Battery), BAK International (Tianjin)
Ltd. (BAK Tianjin), Tianjin Chenhao Technological Development Limited (a
subsidiary of BAK Tianjin established on May 8, 2014,Tianjin Chenhao), BAK
Battery Canada Ltd. (BAK Canada), BAK Europe GmbH (BAK Europe) and BAK
Telecom India Private Limited (BAK India), effective on June 30, 2014, and As
of December 31, 2016 and March 31, 2017, the Companys subsidiaries consisted
of: i) China BAK Asia Holdings Limited (BAK Asia), a wholly owned limited
liability company incorporated in Hong Kong on July 9, 2013; ii) Dalian BAK
Trading Co., Ltd. (Dalian BAK Trading), a wholly owned limited company
established on August 14, 2013 in the PRC; and iii) Dalian BAK Power Battery
Co., Ltd. (Dalian BAK Power), a wholly owned limited liability company
established on December 27, 2013 in the PRC.
On March 7, 2017, the names of the Companys
subsidiaries, Dalian BAK Power Battery Co., Ltd and Dalian BAK Trading Co.,
Ltd., were changed to Dalian CBAK Power Battery Co., Ltd and Dalian CBAK Trading
Co., Ltd, respectively.
F-8
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
1. Principal Activities, Basis of Presentation and
Organization
(continued)
Basis of Presentation and Organization
(continued)
The Company continued its business and continued to generate
revenues from sale of batteries via subcontracting the production to BAK
Tianjin, a former subsidiary before the completion of construction and operation
of its facility in Dalian. BAK Tianjin had become a supplier of the Company
until September 2016 when BAK Tianjin ceased production, and the Company does
not have any significant benefits or liability from the operating results of BAK
Tianjin except the normal risk with any major supplier.
As of the date of this report, Mr. Xiangqian Li is no longer a
director of BAK International and BAK Tianjin. He remained as a director of
Shenzhen BAK and BAK Battery.
On and effective March 1, 2016, Mr. Xiangqian Li resigned as
Chairman, director, Chief Executive Officer, President and Secretary of the
Company. On the same date, the Board of Directors of the Company appointed Mr.
Yunfei Li as Chairman, Chief Executive Officer, President and Secretary of the
Company. On March 4, 2016, Mr. Xiangqian Li transferred 3,000,000 shares to Mr.
Yunfei Li for a price of $2.4 per share. After the share transfer, Mr. Yunfei Li
held 3,000,000 shares or 17.3% and Mr. Xiangqian Li held 760,557 shares at 4.4%
of the Companys outstanding stock, respectively. As of March 31, 2017, Mr.
Yunfei Li held 3,035,000 shares or 15.4% of the Companys outstanding stock and Mr. Xiangqian Li held none of the
Company's share.
The Company had a working capital deficiency, accumulated
deficit from recurring net losses and short-term debt obligations as of December
31, 2016 and March 31, 2017. These factors raise substantial doubts about the
Companys ability to continue as a going concern.
In June and July 2015, the Company received advances of
approximately $9.8 million from potential investors. On September 29, 2015, the
Company entered into a Debt Conversion Agreement with these investors. Pursuant
to the terms of the Debt Conversion Agreement, each of the creditors agreed to
convert existing loan principal of $9,847,644 into an aggregate 4,376,731 shares
of common stock of the Company (the Shares) at a conversion price of $2.25 per
share. Upon receipt of the Shares on October 16, 2015, the creditors released
the Company from all claims, demands and other obligations relating to the
Debts. As such, no interest was recognized by the Company on the advances from
investors pursuant to the supplemental agreements with investors and the Debt
Conversion Agreement.
In June 2016, the Company received further advances in the
aggregate of $2.9 million from Mr. Jiping Zhou and Mr. Dawei Li. These advances
were unsecured, non-interest bearing and repayable on demand. On July 8, 2018,
the Company received further advances of $2.6 million from Mr Jiping Zhou. On
July 28, 2016, the Company entered into securities purchase agreements with Mr.
Jiping Zhou and Mr. Dawei Li to issue and sell an aggregate of 2,206,640 shares
of common stock of the Company, at $2.5 per share, for an aggregate
consideration of approximately $5.52 million. On August 17, 2016, the Company
issued these shares to the investors.
On February 17, 2017, the Company signed a letter of
understanding with each of eight individual investors, who are also the
Companys current shareholders, including the Companys CEO, Mr. Yunfei Li,
whereby these shareholders agreed in principle to subscribe for new shares of
the Companys common stock totaling $10 million, but the purchase price was not
determined at the time of the letter. Each of the shareholders is expected to
enter into a definitive securities purchase agreement with the Company within
the next few months under which the purchase price of shares will be determined
based on the market price at the closing of such purchase. In January 2017, the
shareholders paid the Company a total of $2.03 million as refundable deposits,
among which, Mr. Yunfei Li agreed to subscribe new shares totaling $1.12 million
and pay a refundable deposit of $0.2 million (note 12). The issuance of the
shares to the investors is expected to be made in reliance on the exemption
provided by Section 4(a)(2) of the Securities Act of 1933, as amended, for the
offer and sale of securities not involving a public offering, and Regulation S
promulgated thereunder. In April and May 2017, the Company received cash of $9.6
million from these shareholders. As of the approval date of these financial
statements, no definitive securities purchase agreements have been signed and
the share purchase is not completed.
On June 14, 2016, the Company renewed its banking facilities
from Bank of Dandong to provide a maximum amount of RMB130 million
(approximately $18.9 million), including three-year long-term loans and
three-year revolving bank acceptance and letters of credit bills for the period
from June 13, 2016 to June 12, 2019. The banking facilities were guaranteed by
Mr. Xianqian Li, the Companys former CEO, Ms. Xiaoqiu Yu, the wife of the
Companys former CEO, Shenzhen BAK, Mr. Yunfei Li, the Companys CEO, and Ms.
Qinghui Yuan, Mr. Yunfei Lis wife. The facilities were also secured by part of
its Dalian sites prepaid land use rights, buildings, construction in progress,
machinery and equipment and pledged deposits. Under the banking facilities, from
June to September 2016, the Company borrowed various three-year term bank loans
that totaled RMB126.8 million (approximately $18.4 million), bearing fixed
interest at 7.2% per annum. The Company also borrowed a series of revolving bank
acceptance totaled $0.1 million from Bank of Dandong under the credit
facilities, and bank deposit of 50% was required to secure against these bank
acceptance bills.
On July 6, 2016, the Company obtained banking facilities from
Bank of Dalian to provide a maximum amount of RMB10 million (approximately $1.5
million) and bank acceptance bills of RMB40 million (approximately $5.8 million)
to July 2017. The banking facilities were guaranteed by Mr. Yunfei Li, the
Companys CEO, Ms. Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK.
F-9
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
1. Principal Activities, Basis of Presentation and
Organization
(continued)
Basis of Presentation and Organization
(continued)
Under the banking facilities, on July 6, 2016, the Company
borrowed one year short-term loan of RMB10 million (approximately $1.5 million),
bearing a fixed interest rate at 6.525% per annum. The Company also borrowed a
series of RMB40 million (approximately $5.8 million) of bank acceptance bills
payable from Bank of Dalian, and bank deposit of 50% was required to secure
against these bank acceptance bills.
As of March 31, 2017, the Company had unutilized committed
banking facilities of $0.4 million. The Company plans to renew these loans upon
maturity.
The Company is currently expanding its product lines and
manufacturing capacity in its Dalian plant, which requires more funding to
finance the expansion. The Company plans to raise additional funds through banks
borrowings and equity financing in the future to meet its daily cash demands, if
required.
However, there can be no assurance that the Company will be
successful in obtaining further financing. The Company expects that it will be
able to secure more potential orders from the new energy market, especially from
the electric car market. The Company believes that with the booming future
market demand in high power lithium ion products, they can continue as a going
concern and return to profitability.
The accompanying condensed consolidated financial statements
have been prepared assuming the Company will continue to operate as a going
concern, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. The condensed consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty related to the Companys ability to continue as a going concern.
Recently Issued Accounting Standards
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic
330) - Simplifying the Measurement of Inventory, which requires that inventory
within the scope of the guidance be measured at the lower of cost and net
realizable value. Net realizable value is the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. The Company adopted ASU 2015-11 effective January
1, 2017 and it did not have a material effect on the Companys consolidated
financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, which requires an entity to recognize the amount of
revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB approved a one-year deferral of the effective date of the new revenue
recognition standard. The amendments in ASU 2014-09 are effective for public
companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The standard permits the use of either the
retrospective or cumulative effect transition method. In March 2016, the FASB
issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal
versus Agent Considerations (Reporting Revenue versus Net). In April 2016, the
FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606),
Identifying Performance Obligations and Licensing. In May 2016, the FASB issued
ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives
and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and
2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) -
Narrow Scope Improvements and Practical Expedients. These ASUs clarify the
implementation guidance on a few narrow areas and adds some practical expedients
to the guidance Topic 606. The Company is evaluating the effect the ASUs will
have on its consolidated financial statements and related disclosures. The
Company has not yet selected a transition method nor has it determined the
effect of these standards on its ongoing financial reporting.
In August 2016, the FASB issued ASU No. 2016-15, Classification
of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the
presentation and classification of certain cash receipts and cash payments in
the statement of cash flows. This ASU is effective for public business entities
for fiscal years, and interim periods within those years, beginning after
December 15, 2017. Early adoption is permitted. The Company is currently
assessing the potential impact of ASU 2016-15 on its financial statements and
related disclosures.
In October 2016, the FASB issued ASU No. 2016-16Income Taxes
(Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU
improves the accounting for the income tax consequences of intra-entity
transfers of assets other than inventory. This ASU is effective for fiscal years
and interim periods within those years beginning after December 15, 2017. Early
adoption is permitted. The Company does not anticipate that the adoption of this
ASU to have a significant impact on its consolidated financial statements.
F-10
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
1. Principal Activities, Basis of Presentation and
Organization
(continued)
Basis of Presentation and Organization
(continued)
In November 2016, the FASB issued Accounting Standards Update
2016-18 (ASU 2016-18), Statement of Cash Flows: Restricted Cash. This ASU
provides guidance on the classification of restricted cash in the statement of
cash flows. The amendments in this ASU are effective for interim and annual
periods beginning after December 15, 2017. Early adoption is permitted. The
amendments in the ASU should be adopted on a retrospective basis. The Company
does not expect that adoption of this ASU to have a material effect on its
consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business
Combinations (Topic 805): Clarifying the Definition of a Business, which
clarifies the definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be accounted for as
acquisitions or disposals of assets or businesses. The standard is effective for
fiscal years beginning after December 15, 2017, including interim periods within
those fiscal years. Early adoption is permitted. The standard should be applied
prospectively on or after the effective date. The Company will evaluate the
impact of adopting this standard prospectively upon any transactions of
acquisitions or disposals of assets or businesses.
In January 2017, the FASB issued ASU 2017-04, Simplifying the
Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill
impairment test, which requires a hypothetical purchase price allocation. A
goodwill impairment will now be the amount by which a reporting units carrying
value exceeds its fair value, not to exceed the carrying amount of goodwill. The
guidance should be adopted on a prospective basis for the annual or any interim
goodwill impairment tests beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed on testing
dates after January 1, 2017. The Company is currently evaluating the impact of
adopting this standard on its consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, Other Income
Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic
610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for
Partial Sales of Nonfinancial Assets. The amendments clarify that a financial
asset is within the scope of Subtopic 610-20 if it meets the definition of an in
substance nonfinancial asset. The amendments also define the term in substance
nonfinancial asset. The amendments in this update are effective at the same time
as the amendments in ASU 2014-09. The Company is evaluating the effect this ASU
will have on its consolidated financial statements and related disclosures.
Other accounting standards that have been issued or proposed by
the FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the Companys
consolidated financial statements upon adoption.
2.
|
Pledged deposits
|
|
|
|
Pledged deposits as of December 31, 2016 and March 31,
2017 consisted of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Pledged deposits for:
|
|
|
|
|
|
|
|
Bills payable
|
$
|
3,064,155
|
|
$
|
2,955,293
|
|
|
Others *
|
|
1,213,989
|
|
|
1,223,858
|
|
|
|
$
|
4,278,144
|
|
$
|
4,179,151
|
|
|
*
|
On July 7, 2016, Shenzhen Huijie Purification System
Engineering Co., Ltd (Shenzhen Huijie), one of the Companys
contractors, filed a lawsuit against Dalian BAK Power in the Peoples
Court of Zhuanghe City, Dalian for the failure to pay pursuant to the
terms of the contract and entrusted part of the project of the contract to
a third party without their prior consent. The plaintiff sought a total
amount of $1,223,858 (RMB 8,430,792), including construction costs of $0.9
million (RMB6.3 million), interest of $0.03 million (RMB0.2 million) and
compensation of $0.3 million (RMB1.9 million), which we already accrued
for As of March 31, 2017. On September 7, 2016, upon the request of
Shenzhen Huijie, the Court froze Dalian BAK Powers bank deposits totaling
$1,223,858 (RMB 8,430,792) for a period of one
year.
|
F-11
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
3.
|
Trade Accounts and Bills Receivable, net
|
|
|
|
Trade accounts and bills receivable as of December 31,
2016 and March 31, 2017 consisted of the
following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Trade accounts receivable
|
$
|
5,169,593
|
|
$
|
8,457,503
|
|
|
Less: Allowance for doubtful accounts
|
|
(2,761,144
|
)
|
|
(2,792,695
|
)
|
|
|
|
2,408,449
|
|
|
5,664,808
|
|
|
Bills receivable
|
|
59,938
|
|
|
324,904
|
|
|
|
$
|
2,468,387
|
|
$
|
5,989,712
|
|
An analysis of the allowance for
doubtful accounts is as follows:
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Balance at beginning of
period
|
$
|
165,441
|
|
$
|
2,761,144
|
|
|
Provision for the period
|
|
11,988
|
|
|
38,706
|
|
|
Reversal by cash collected for the
period
|
|
(51,242
|
)
|
|
(29,601
|
)
|
|
Charged to consolidated statements of
operations and comprehensive income
|
|
(39,254
|
)
|
|
9,105
|
|
|
Foreign exchange adjustment
|
|
1,713
|
|
|
22,446
|
|
|
Balance at end of period
|
$
|
127,900
|
|
$
|
2,792,695
|
|
4.
|
Inventories
|
|
|
|
Inventories as of December 31, 2016 and March 31, 2017
consisted of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Raw materials
|
$
|
2,570,942
|
|
$
|
2,423,512
|
|
|
Work in progress
|
|
1,333,949
|
|
|
1,694,711
|
|
|
Finished goods
|
|
13,190,031
|
|
|
13,193,288
|
|
|
|
$
|
17,094,922
|
|
$
|
17,311,511
|
|
During the three months ended March 31, 2016 and
2017, write-downs of obsolete inventories to lower of cost or market of $96,910
and $150,156, respectively, were charged to cost of revenues.
5.
|
Prepayments and Other Receivables
|
|
|
|
Prepayments and other receivables as of December 31, 2016
and March 31, 2017 consisted of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Value added tax recoverable
|
$
|
6,238,056
|
|
$
|
6,404,298
|
|
|
Prepayments to suppliers
|
|
148,247
|
|
|
270,675
|
|
|
Deposits
|
|
28,763
|
|
|
108,265
|
|
|
Staff advances
|
|
46,572
|
|
|
101,037
|
|
|
Prepaid operating expenses
|
|
220,713
|
|
|
265,101
|
|
|
|
|
6,682,351
|
|
|
7,149,376
|
|
|
Less: Allowance for doubtful
accounts
|
|
(7,000
|
)
|
|
(7,000
|
)
|
|
|
$
|
6,675,351
|
|
$
|
7,142,376
|
|
F-12
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
6.
|
Payables to Former Subsidiaries
|
|
|
|
Payable to former subsidiaries as of December 31, 2016
and March 31, 2017 consisted of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
BAK Tianjin
|
$
|
194,774
|
|
$
|
172,434
|
|
|
Shenzhen BAK
|
|
2,294,085
|
|
|
5,135,950
|
|
|
|
$
|
2,488,859
|
|
$
|
5,308,384
|
|
Balance as of December 31, 2016 and March 31, 2017
consisted of payables for purchase of inventories from BAK Tianjin and
Shenzhen BAK. From time to time, the Company purchased products from these
former subsidiaries that they did not produce to meet the needs of its
customers.
7.
|
Property, Plant and Equipment, net
|
|
|
|
Property, plant and equipment as of December 31, 2016 and
March 31, 2017 consisted of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Buildings
|
$
|
16,877,909
|
|
$
|
17,015,114
|
|
|
Machinery and equipment
|
|
4,473,631
|
|
|
6,055,222
|
|
|
Office equipment
|
|
96,655
|
|
|
113,068
|
|
|
Motor vehicles
|
|
193,165
|
|
|
194,735
|
|
|
|
|
21,641,360
|
|
|
23,378,139
|
|
|
Accumulated depreciation
|
|
(1,630,457
|
)
|
|
(1,935,577
|
)
|
|
Carrying amount
|
$
|
20,010,903
|
|
$
|
21,442,562
|
|
F-13
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
7.
|
Property, Plant and Equipment, net
(continued)
|
|
|
|
During the three months period ended March 31, 2017 and
2016, the Company incurred depreciation expense of $291,872 and $273,022,
respectively.
|
|
|
|
The Company has not yet obtained the property ownership
certificates of the buildings in its Dalian manufacturing facilities with
a carrying amount of $16,178,549 and $15,816,181 as of December 31, 2016
and March 31, 2017, respectively. The Company built its facilities on the
land for which it had already obtained the related land use right. The
Company has submitted applications to the Chinese government for the
ownership certificates on the completed buildings located on these lands.
However, the application process takes longer than the Company expected
and it has not obtained the certificates as of the date of this report.
However, since the Company has obtained the land use right in relation to
the land, the management believe the Company has legal title to the
buildings thereon albeit the lack of ownership certificates. As soon as
the Chinese government completes its formalities, the Company will obtain
the ownership certificates. As of March 31, 2017, the Company had the
permission to obtain the ownership certificate of the completed buildings.
|
|
|
|
During the course of the Companys strategic review of
its operations, the Company assessed the recoverability of the carrying
value of the Companys property, plant and equipment. The impairment
charge, if any, represented the excess of carrying amounts of the
Companys property, plant and equipment over the estimated discounted cash
flows expected to be generated by the Companys production facilities. The
Company believes that there was no impairment of its property, plant and
equipment as of December 31, 2016 and March 31, 2017.
|
|
|
8.
|
Construction in Progress
|
|
|
|
Construction in progress as of December 31, 2016 and
March 31, 2017 consisted of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Construction in progress
|
$
|
33,277,338
|
|
$
|
32,989,048
|
|
|
Prepayment for acquisition of property, plant
and equipment
|
|
179,705
|
|
|
65,859
|
|
|
Carrying amount
|
$
|
33,457,043
|
|
$
|
33,054,907
|
|
Construction in progress as of December
31, 2016 and March 31, 2017 was mainly comprised of capital expenditures for the
construction of the facilities and production lines of Dalian BAK Power.
For the three months ended March 31,
2016 and 2017, the Company capitalized interest of $242,338 and $358,960
respectively, to the cost of construction in progress.
F-14
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
9.
|
Prepaid Land Use Rights, net
|
|
|
|
Prepaid land use rights as of December 31, 2016 and March
31, 2017 consisted of the followings:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Prepaid land use rights
|
$
|
8,089,516
|
|
$
|
8,155,279
|
|
|
Accumulated amortization
|
|
(390,993
|
)
|
|
(434,948
|
)
|
|
|
$
|
7,698,523
|
|
$
|
7,720,331
|
|
|
Less: Classified as current assets
|
|
(161,790
|
)
|
|
(163,106
|
)
|
|
|
$
|
7,536,733
|
|
$
|
7,557,225
|
|
Pursuant to a land use rights acquisition agreement dated
August 10, 2014, the Company acquired the rights to use a piece of land
with an area of 153,832 m
2
in Dalian Economic Zone for 50 years
up to August 9, 2064, at a total consideration of $7,703,921 (RMB53.1
million). Other incidental costs incurred totaled $451,358 (RMB3.1
million).
Amortization expenses of the prepaid land use rights were
$42,936 and $40,778 for the three months ended March 31, 2016 and 2017,
respectively.
10.
|
Intangible Assets, net
|
|
|
|
Intangible assets as of December 31, 2016 and March 31,
2017 consisted of the followings:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Computer software at cost
|
$
|
25,613
|
|
$
|
25,821
|
|
|
Accumulated amortization
|
|
(4,269
|
)
|
|
(4,949
|
)
|
|
|
$
|
21,344
|
|
$
|
20,872
|
|
Amortization expenses were $679 and $646 for the three
months ended March 31, 2016 and 2017, respectively.
11.
|
Bank Loans
|
|
|
|
Bank borrowings as of December 31, 2016 and March 31,
2017 consisted of the followings
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Short-term bank borrowings
|
$
|
1,439,947
|
|
$
|
1,451,653
|
|
|
Long-term bank borrowings
|
|
18,258,528
|
|
|
18,406,956
|
|
|
|
$
|
19,698,475
|
|
$
|
19,858,609
|
|
On June 10 and 15, 2016, the Company
repaid Bank of Dandong the one-year short term loans of RMB30 million and RMB50
million, respectively, obtained under its banking facilities in June 2015. On
June 14, 2016, the Company renewed its banking facilities from Bank of Dandong
to provide a maximum amount of RMB130 million (approximately $18.9 million),
including three-year long-term loans and three-year revolving bank acceptance
and letters of credit bills for the period from June 13, 2016 to June 12, 2019.
Under the banking facilities, from June to September 2016, the Company borrowed
various three-year bank loans that totaled RMB126.8 million (approximately $18.4
million), bearing fixed interest at 7.2% per annum. The banking facilities were
guaranteed by Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of the
Companys former CEO, Shenzhen BAK, Mr. Yunfei Li, the Companys CEO, and Ms.
Qinghui Yuan, Mr. Yunfei Lis wife.
On July 6, 2016, the Company obtained
new banking facilities from Bank of Dalian to provide a maximum loan amount of
RMB10 million (approximately $1.5 million) and bank acceptance of RMB40 million
(approximately $5.8 million) to July 2017. The banking facilities were
guaranteed by Shenzhen BAK, Mr. Yunfei Li, our CEO, and Ms. Qinghui Yuan, Mr.
Yunfei Lis wife. On July 6, 2016, the Company borrowed a one-year term bank
loan of RMB10 million (approximately $1.5 million), bearing fixed interest at
6.525% per annum.
F-15
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
11.
|
Bank Loans
(continued)
|
|
|
|
The facilities were also secured by the Companys assets
with the following carrying amounts:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Pledged deposits (note 2)
|
$
|
3,064,155
|
|
$
|
2,955,293
|
|
|
Prepaid land use rights (note 9)
|
|
7,698,523
|
|
|
7,720,331
|
|
|
Buildings
|
|
11,729,172
|
|
|
11,740,821
|
|
|
Machinery and equipment
|
|
2,598,882
|
|
|
2,920,192
|
|
|
Construction in progress
|
|
6,156,488
|
|
|
6,185,395
|
|
|
|
$
|
31,247,220
|
|
$
|
31,522,032
|
|
|
As of March 31, 2017, the Company had unutilized
committed banking facilities of $0.4 million.
|
|
|
|
During the three months ended March 31, 2016 and 2017,
interest of $242,338 and $358,960, respectively, was incurred on the
Company's bank borrowings.
|
|
|
12.
|
Other Short-term Loans
|
|
|
|
Other short-term loans as of December 31, 2016 and March
31, 2017 consisted of the following:
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
Note
|
|
|
2016
|
|
|
2017
|
|
|
Advance from related parties
|
|
|
|
|
|
|
|
|
|
Tianjin BAK New Energy
Research Institute Co., Ltd (Tianjin New Energy)
|
(a)
|
|
$
|
9,252,127
|
|
$
|
11,197,068
|
|
|
Mr.
Xiangqian Li, the Companys Former CEO
|
(b)
|
|
|
100,000
|
|
|
100,000
|
|
|
Shareholders
(note 1)
|
(c)
|
|
|
-
|
|
|
2,032,313
|
|
|
|
|
|
|
9,352,127
|
|
|
13,329,381
|
|
|
Advances from unrelated third party
|
|
|
|
|
|
|
|
|
|
Mr. Guozhu Liang
|
(d)
|
|
|
14,399
|
|
|
14,517
|
|
|
Mr. Wenwu Yu
|
(d)
|
|
|
145,410
|
|
|
146,592
|
|
|
Mr. Mingzhe
Li
|
(d)
|
|
|
796,850
|
|
|
1,892,067
|
|
|
Ms. Longqian Peng
|
(d)
|
|
|
215,992
|
|
|
653,244
|
|
|
|
|
|
|
1,172,651
|
|
|
2,706,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,524,778
|
|
$
|
16,035,801
|
|
|
(a)
|
The Company received advances from Tianjin New Energy, a
related company under the control of Mr. Xiangqian Li, the Companys
former CEO, which was unsecured, non-interest bearing and repayable on
demand. On November 1, 2016, Mr. Xiangqian Li ceased to be a shareholder
but remained as a general manager of Tianjin New Energy. As of December
31, 2016 and March 31, 2017, the payable to Tianjin New Energy of $20,384
and $0, respectively, was included in trade accounts and bills
payable.
|
|
|
|
|
(b)
|
Advances from Mr. Xiangqian Li, the Companys former CEO,
was unsecured, non-interest bearing and repayable on demand.
|
|
|
|
|
(c)
|
The refundable deposits paid by certain shareholders in
relation to share purchase (note 1) were unsecured, non-interest bearing
and repayable on demand.
|
|
|
|
|
(d)
|
Advances from unrelated third parties were unsecured,
non-interest bearing and repayable on demand.
|
F-16
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
13.
|
Accrued Expenses and Other Payables
|
|
|
|
Accrued expenses and other payables as of December 31,
2016 and March 31, 2017 consisted of the
following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Construction costs payable
(note 19 (ii))
|
$
|
7,322,941
|
|
$
|
6,017,954
|
|
|
Equipment purchase payable
|
|
8,229,828
|
|
|
9,334,717
|
|
|
Liquidated damages (note a)
|
|
1,210,119
|
|
|
1,210,119
|
|
|
Accrued staff costs
|
|
1,532,802
|
|
|
1,448,621
|
|
|
Compensation costs (note
19(ii))
|
|
309,974
|
|
|
312,494
|
|
|
Product warranty (note b)
|
|
205,404
|
|
|
345,826
|
|
|
Customer deposits
|
|
62,231
|
|
|
85,552
|
|
|
Other payables and accruals
|
|
509,294
|
|
|
568,948
|
|
|
|
$
|
19,382,593
|
|
$
|
19,324,231
|
|
|
(a)
|
On August 15, 2006, the SEC declared effective a
post-effective amendment that the Company had filed on August 4, 2006,
terminating the effectiveness of a resale registration statement on Form
SB-2 that had been filed pursuant to a registration rights agreement with
certain shareholders to register the resale of shares held by those
shareholders. The Company subsequently filed Form S-1 for these
shareholders. On December 8, 2006, the Company filed its Annual Report on
Form 10-K for the year ended September 30, 2006 (the 2006 Form 10-K).
After the filing of the 2006 Form 10-K, the Companys previously filed
registration statement on Form S-1 was no longer available for resale by
the selling shareholders whose shares were included in such Form S-1.
Under the registration rights agreement, those selling shareholders became
eligible for liquidated damages from the Company relating to the above two
events totaling approximately $1,051,000. As of December 31, 2016 and
March 31, 2017, no liquidated damages relating to both events have been
paid.
|
|
|
|
|
|
On November 9, 2007, the Company completed a private
placement for the gross proceeds to the Company of $13,650,000 by selling
3,500,000 shares of common stock at the price of $3.90 per share. Roth
Capital Partners, LLC acted as the Companys exclusive financial advisor
and placement agent in connection with the private placement and received
a cash fee of $819,000. The Company may have become liable for liquidated
damages to certain shareholders whose shares were included in a resale
registration statement on Form S-3 that the Company filed pursuant to a
registration rights agreement that the Company entered into with such
shareholders in November 2007. Under the registration rights agreement,
among other things, if a registration statement filed pursuant thereto was
not declared effective by the SEC by the 100th calendar day after the
closing of the Companys private placement on November 9, 2007, or the
Effectiveness Deadline, then the Company would be liable to pay partial
liquidated damages to each such investor of (a) 1.5% of the aggregate
purchase price paid by such investor for the shares it purchased on the
one month anniversary of the Effectiveness Deadline; (b) an additional
1.5% of the aggregate purchase price paid by such investor every thirtieth
day thereafter (pro rated for periods totaling less than thirty days)
until the earliest of the effectiveness of the registration statement, the
ten-month anniversary of the Effectiveness Deadline and the time that the
Company is no longer required to keep such resale registration statement
effective because either such shareholders have sold all of their shares
or such shareholders may sell their shares pursuant to Rule 144 without
volume limitations; and (c) 0.5% of the aggregate purchase price paid by
such investor for the shares it purchased in the Companys November 2007
private placement on each of the following dates: the ten-month
anniversary of the Effectiveness Deadline and every thirtieth day
thereafter (prorated for periods totaling less than thirty days), until
the earlier of the effectiveness of the registration statement and the
time that the Company no longer is required to keep such resale
registration statement effective because either such shareholders have
sold all of their shares or such shareholders may sell their shares
pursuant to Rule 144 without volume limitations. Such liquidated damages
would bear interest at the rate of 1% per month (prorated for partial
months) until paid in full.
|
|
|
|
|
|
On December 21, 2007, pursuant to the registration rights
agreement, the Company filed a registration statement on Form S-3, which
was declared effective by the SEC on May 7, 2008. As a result, the Company
estimated liquidated damages amounting to $561,174 for the November 2007
registration rights agreement. As of December 31, 2016 and March 31, 2017,
the Company had settled the liquidated damages with all the investors and
the remaining provision of approximately $159,000 was included in other
payables and accruals.
|
F-17
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
13.
|
Accrued Expenses and Other Payables
(continued)
|
|
|
|
|
(b)
|
The Company maintains a policy of providing after sales
support for certain of its new EV and LEV battery products introduced
since October 1, 2015 by way of a warranty program. The Company accrues an
estimate of its exposure to warranty claims based on both current and
historical product sales data and warranty costs incurred. The Company
assesses the adequacy of its recorded warranty liability at least annually
and adjusts the amounts as necessary. The Company recognized warranty
expenses amounting to $131,184 and $140,564 for the quarters ended March
31,2016 and 2017 respectively, which are included in its sales and
marketing expenses.
|
14.
|
Deferred Government Grants
|
|
|
|
Deferred government grants as of December 31, 2016 and
March 31, 2017 consist of the following:
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Total government grants
|
$
|
4,699,261
|
|
$
|
4,701,574
|
|
|
Less: Current portion
|
|
(142,400
|
)
|
|
(143,558
|
)
|
|
Non-current portion
|
$
|
4,556,861
|
|
$
|
4,558,016
|
|
In September 2013, the Management Committee of Dalian
Economic Zone Management Committee (the Management Committee) provided a
subsidy of RMB150 million to finance the costs incurred in moving our
facilities to Dalian, including the loss of sales while the new facilities
were being constructed. For the year ended September 30, 2015, the Company
recognized $23,103,427 as income after offset of the related removal
expenditures of $1,004,027. No such income or offset was recognized in
fiscal 2016 and 2017.
On October 17, 2014, the Company received a subsidy of
RMB46,150,000 pursuant to an agreement with the Management Committee dated
July 2, 2013 for costs of land use rights and to be used to construct the
new manufacturing site in Dalian. Part of the facilities had been
completed and was operated in July 2015 and the Company has initiated
amortization on a straight-line basis over the estimated useful lives of
the depreciable facilities constructed thereon.
The Company offset government grants of $44,089 and
$35,890 for the three months ended March 31, 2016 and 2017, respectively,
against depreciation expenses of the Dalian facilities.
15.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities
|
(a) Income taxes in the condensed consolidated statements of
comprehensive loss (income)
The Companys provision for income
taxes expenses consisted of:
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
PRC income tax:
|
|
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
|
|
Deferred
|
|
(57,241
|
)
|
|
-
|
|
|
|
$
|
(57,241
|
)
|
$
|
-
|
|
United States Tax
China BAK
is subject to a statutory tax rate of 35% under United States of America tax
law. No provision for income taxes in the United States or elsewhere has been
made as China BAK had no taxable income for the three months ended March 31,
2016 and 2017.
Hong Kong Tax
BAK Asia is
subject to Hong Kong profits tax rate of 16.5% and did not have any assessable
profits arising in or derived from Hong Kong for the three months ended March
31, 2016 and 2017 and accordingly no provision for Hong Kong profits tax was
made in these periods.
PRC Tax
The Companys
subsidiaries in China are subject to enterprise income tax at 25% for the three
months ended March 31, 2016 and 2017.
F-18
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
15.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities
(continued)
|
|
|
|
A reconciliation of the provision for income taxes
determined at the statutory income tax rate to the Company's income taxes
is as follows:
|
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Loss before income taxes
|
$
|
(1,960,399
|
)
|
$
|
(2,068,216
|
)
|
|
United States federal corporate income tax rate
|
|
35%
|
|
|
35%
|
|
|
Income tax credit computed at United States
statutory corporate income tax rate
|
|
(686,139
|
)
|
|
(723,876
|
)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
Rate differential for PRC earnings
|
|
146,434
|
|
|
161,427
|
|
|
Non-deductible expenses
|
|
66,495
|
|
|
70,523
|
|
|
Share-based payments
|
|
112,475
|
|
|
88,371
|
|
|
Valuation allowance on deferred tax assets
|
|
336,907
|
|
|
403,555
|
|
|
Others
|
|
(33,413
|
)
|
|
-
|
|
|
Income tax credit
|
$
|
(57,241
|
)
|
$
|
-
|
|
(a) Deferred tax assets and deferred tax liabilities
The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and liabilities as of December 31, 2016 and March 31, 2017 are presented below:
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
692,736
|
|
$
|
700,624
|
|
|
Inventories
|
|
254,852
|
|
|
294,462
|
|
|
Property, plant and equipment
|
|
373,287
|
|
|
376,322
|
|
|
Net operating loss carried forward
|
|
38,055,264
|
|
|
38,408,287
|
|
|
Valuation allowance
|
|
(39,376,139
|
)
|
|
(39,779,695
|
)
|
|
Deferred tax assets, non-current
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities,
non-current
|
$
|
-
|
|
$
|
-
|
|
As of December 31, 2016 and March 31,
2017, the Companys U.S. entity had net operating loss carry forwards of
$103,580,741, respectively, of which $102,293 available to reduce future taxable
income which will expire in various years through 2035 and $103,478,448
available to offset capital gains recognized in the succeeding 5 tax years and
the Companys PRC subsidiaries had net operating loss carry forwards of
$7,213,329 and $8,620,109, respectively, which will expire in various years
through 2021. Management believes it is more likely than not that the Company
will not realize these potential tax benefits as these operations will not
generate any operating profits in the foreseeable future. As a result, a
valuation allowance was provided against the full amount of the potential tax
benefits.
The Company did not provide for
deferred income taxes and foreign withholding taxes on the cumulative
undistributed earnings of foreign subsidiaries as of December 31, 2016 and March
31, 2017 of approximately of $2.0 million and $0.4 million, respectively. The
cumulative distributed earnings of foreign subsidiaries were included in
accumulated deficit and will continue to be indefinitely reinvested in
international operations. Accordingly, no provision has been made for U.S.
deferred taxes or applicable withholding taxes, related to future repatriation
of these earnings, nor is it practicable to estimate the amount of income taxes
that would have to be provided if management concluded that such earnings will
be remitted in the future.
According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the
underpayment of taxes is due to computational errors made by the taxpayer or its
withholding agent. The statute of limitations extends to five years under
special circumstances, which are not clearly defined. In the case of a related
party transaction, the statute of limitations is ten years. There is no statute
of limitations in the case of tax evasion.
The impact of an uncertain income tax
positions on the income tax return must be recognized at the largest amount that
is more likely than not to be sustained upon audit by the relevant tax
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Interest and penalties on income
taxes will be classified as a component of the provisions for income taxes.
F-19
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
15.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities
(continued)
|
|
|
|
The significant uncertain tax position arose from the
subsidies granted by the local government for the Companys PRC
subsidiary, which may be modified or challenged by the central government
or the tax authority. A reconciliation of January 1, 2017, through
March 31, 2017 amount of unrecognized tax benefits excluding interest
and penalties ("Gross UTB") is as follows:
|
|
|
|
Gross UTB
|
|
|
Surcharge
|
|
|
Net
UTB
|
|
|
Balance as of January 1,
2017
|
$
|
7,061,140
|
|
$
|
-
|
|
$
|
7,061,140
|
|
|
Decrease in unrecognized tax benefits taken
in current period
|
|
(550,335
|
)
|
|
-
|
|
|
(550,335
|
)
|
|
Balance as of March 31, 2017
|
$
|
6,510,805
|
|
$
|
-
|
|
$
|
6,510,805
|
|
As of December 31, 2016 and March 31, 2017, the Company had not
accrued any interest and penalties related to unrecognized tax benefits.
16.
|
Share-based Compensation
|
|
|
|
Restricted Shares
|
|
|
|
Restricted shares granted on June 30, 2015
|
|
|
|
On June 12, 2015, the Board of Director approved the
China BAK Battery, Inc. 2015 Equity Incentive Plan (the 2015 Plan) for
Employees, Directors and Consultants of the Company and its Affiliates.
The maximum aggregate number of Shares that may be issued under the Plan
is ten million (10,000,000) Shares.
|
|
|
|
On June 30, 2015, pursuant to the 2015 Plan, the
Compensation Committee of the Companys Board of Directors granted an
aggregate of 690,000 restricted shares of the Companys common stock, par
value $0.001, to certain employees, officers and directors of the Company
with a fair value of $3.24 per share on June 30, 2015. In accordance with
the vesting schedule of the grant, the restricted shares will vest in
twelve equal quarterly installments on the last day of each fiscal quarter
beginning on June 30, 2015 (i.e. last vesting period: quarter ended March
31, 2018). The Company recognizes the share-based compensation expenses on
a graded-vesting method.
|
|
|
|
The Company recorded non-cash share-based compensation
expense of $321,355 for the three months ended March 31, 2016, in respect
of the restricted shares granted on June 30, 2015, of which $263,139,
$37,259 and $20,957 were allocated to general and administrative expenses,
research and development expenses and sales and marketing expenses,
respectively.
|
|
|
|
The Company recorded non-cash share-based compensation
expense of $99,834 for three months ended March 31, 2017, in respect of
the restricted shares granted on June 30, 2015, of which $81,749, $11,575
and $6,510 were allocated to general and administrative expenses, research
and development expenses and sales and marketing expenses,
respectively.
|
|
|
|
As of March 31, 2017, non-vested restricted shares
granted on June 30, 2015 are as follows:
|
|
Non-vested shares as of January 1, 2017
|
|
275,000
|
|
|
Granted
|
|
-
|
|
|
Vested
|
|
(55,000
|
)
|
|
Forfeited
|
|
-
|
|
|
Non-vested shares as of March 31, 2017
|
|
220,000
|
|
As of March 31, 2017, there was
unrecognized stock-based compensation of $181,433 associated with the above
restricted shares. As of March 31, 2017, 55,000 vested shares were to be issued.
F-20
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
16.
|
Share-based Compensation
(continued)
|
|
|
|
Restricted shares granted on April 19, 2016
|
|
|
|
On April 19, 2016, pursuant to the Companys 2015 Equity
Incentive Plan, the Compensation Committee of the Board of Directors of
the Company (the Compensation Committee) granted an aggregate of 500,000
restricted shares of the Companys common stock, par value $0.001 (the
Restricted Shares), to certain employees, officers and directors of the
Company, of which 220,000 restricted shares were granted to the Companys
executive officers and directors. There are three types of vesting
schedules. First, if the number of restricted shares granted is below
3,000, the shares will vest annually in 2 equal installments over a two
year period with the first vesting on June 30, 2017. Second, if the number
of restricted shares granted is larger than or equal to 3,000 and is below
10,000, the shares will vest annually in 3 equal installments over a three
year period with the first vesting on June 30, 2017. Third, if the number
of restricted shares granted is above or equal to 10,000, the shares will
vest semi-annually in 6 equal installments over a three year period with
the first vesting on December 31, 2016. The fair value of these restricted
shares was $2.68 per share on April 19, 2016. The Company recognizes the
share-based compensation expenses over the vesting period (or the
requisite service period) on a graded-vesting method.
|
|
|
|
The Company recorded non-cash share-based compensation
expense of $152,654 for the three months ended March 31, 2017, in respect
of the restricted shares granted on April 19, 2016 of which $115,712,
$19,845, $9,464 and $7,633 were allocated to general and administrative
expenses, research and development expenses, sales and marketing expenses
and cost of revenues, respectively.
|
|
|
|
As of March 31, 2017, non-vested restricted shares
granted on April 19, 2016 are as follows:
|
|
Non-vested shares as of January 1, 2017
|
|
433,500
|
|
|
Granted
|
|
-
|
|
|
Vested
|
|
-
|
|
|
Forfeited
|
|
-
|
|
|
Non-vested shares as of March 31, 2017
|
|
433,500
|
|
|
As of March 31, 2017, there was unrecognized stock-based
compensation of $584,235 associated with the above restricted
shares.
|
|
|
|
As the Company itself is an investment holding company
which is not expected to generate operating profits to realize the tax
benefits arising from its net operating loss carried forward, no income
tax benefits were recognized for such stock-based compensation cost under
the stock option plan for the three months ended March 31, 2016 and
2017.
|
|
|
17.
|
Loss Per Share
|
|
|
|
The following is the calculation of loss per
share:
|
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Net loss
|
$
|
(1,903,158
|
)
|
$
|
(2,068,216
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used
in basic and diluted computation (note)
|
|
17,229,432
|
|
|
19,856,778
|
|
|
|
|
|
|
|
|
|
|
Loss per share
|
$
|
(0.11
|
)
|
$
|
(0.10
|
)
|
Note: Including 90,834 and 55,000 vested restricted shares granted pursuant to
the 2015 Plan that were not yet issued for the three months ended March 31, 2016
and 2017, respectively.
For the three months ended March 31,
2016 and 2017, 440,000 and 653,500 unvested restricted shares were anti-dilutive
and excluded from shares used in the diluted computation.
F-21
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
18.
|
Fair Value of Financial Instruments
|
|
|
|
ASC Topic 820,
Fair Value Measurement and
Disclosures
, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date.
This topic also establishes a fair value hierarchy, which requires
classification based on observable and unobservable inputs when measuring
fair value. Certain current assets and current liabilities are financial
instruments. Management believes their carrying amounts are a reasonable
estimate of fair value because of the short period of time between the
origination of such instruments and their expected realization and, if
applicable, their current interest rates are equivalent to interest rates
currently available. The three levels of valuation hierarchy are defined
as follows:
|
|
|
Level 1 inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
Level 2 inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial instruments.
|
|
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
|
The carrying amounts of financial assets and liabilities,
such as cash and cash equivalents, pledged deposits, trade accounts and
bills receivable and payable, other receivables, balances with former
subsidiaries, other short-term loans, short-term and long-term bank loans
and other payables approximate their fair values because of the short
maturity of these instruments or the rate of interest of these instruments
approximate the market rate of interest.
|
|
|
19.
|
Commitments and
Contingencies
|
(i) Capital Commitments
As of December 31, 2016 and March 31,
2017, the Company had the following contracted capital commitments:
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
For construction of buildings
|
$
|
2,225,978
|
|
$
|
2,300,606
|
|
|
For purchases of equipment
|
|
451,063
|
|
|
229,651
|
|
|
Capital injection to Dalian
BAK Power and Dalian BAK Trading
Note
|
|
9,895,996
|
|
|
9,895,996
|
|
|
|
$
|
12,573,037
|
|
$
|
12,426,253
|
|
|
Note:
|
Initially, BAK Asia was required to pay the remaining
capital within two years, of the date of issuance of the subsidiarys
business license according to PRC registration capital management rules.
According to the revised PRC Companies Law which became effective on March
2014, the time requirement of the registered capital contribution has been
abolished. As such, BAK Asia has its discretion to consider the timing of
the registered capital contributions. On April and May 2017, Dalian BAK
Power received $9,495,974 injected from BAK Asia.
|
(ii) Litigation
On July 7, 2016, Shenzhen Huijie
Purification System Engineering Co., Ltd (Shenzhen Huijie), one of the
Companys contractors, filed a lawsuit against Dalian BAK Power in the Peoples
Court of Zhuanghe City, Dalian for the failure to pay pursuant to the terms of
the contract and entrusted part of the project of the contract to a third party
without their prior consent. The plaintiff sought a total amount of
$1,223,858(RMB 8,430,792), including construction costs of $0.9 million (RMB6.3
million), interest of $0.03 million (RMB0.2 million) and compensation of $0.3 million
(RMB1.9 million), which the Company already accrued for as of December 31, 2016. On September 7, 2016, upon the request of Shenzhen Huijie, the Court froze
Dalian BAKs bank deposits totaling $1,223,858 (RMB 8,430,792) for a period of
one year.
F-22
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
20.
|
Concentrations and Credit Risk
|
|
|
|
|
(a)
|
Concentrations
|
|
|
|
|
|
The Company had the following customers that individually
comprised 10% or more of net revenue for the three months ended March 31,
2016 and 2017 as follows:
|
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Customer A
|
$
|
*
|
|
|
*
|
|
$
|
3,110,679
|
|
|
83.71%
|
|
|
Customer B
|
|
1,362,787
|
|
|
42.60%
|
|
|
*
|
|
|
*
|
|
|
Customer C
|
$
|
1,265,844
|
|
|
39.57%
|
|
$
|
*
|
|
|
*
|
|
|
*
|
Comprised less than 10% of net revenue for the respective
period.
|
|
|
|
|
|
The Company had the following customers that individually
comprised 10% or more of accounts receivable As of December 31, 2016 and
March 31, 2017 as follows:
|
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
|
Customer A
|
$
|
857,180
|
|
|
34.73%
|
|
$
|
4,555,928
|
|
|
76.06%
|
|
|
Customer B
|
|
1,286,206
|
|
|
52.11%
|
|
|
1,151,496
|
|
|
19.22%
|
|
|
*
|
Comprised less than 10% of account receivable for the
respective period.
|
|
|
|
|
|
For the three months ended March 31, 2016 and 2017, the
Company recorded the following transactions:
|
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
Purchase of inventories from
|
|
|
|
|
|
|
|
BAK Tianjin
|
$
|
140,400
|
|
$
|
-
|
|
|
Shenzhen BAK
|
|
11,888
|
|
|
2,362,444
|
|
|
Zhengzhou BAK Battery Co., Ltd*
|
|
-
|
|
|
12,457
|
|
|
|
|
|
|
|
|
|
|
Sales of finished goods to
|
|
|
|
|
|
|
|
BAK Tianjin
|
|
27,007
|
|
|
26,546
|
|
|
Shenzhen BAK
|
|
215,178
|
|
|
60,797
|
|
|
Zhengzhou BAK Battery Co., Ltd*
|
$
|
-
|
|
$
|
13,648
|
|
*Mr. Xiangqian Li, the former CEO, is
a director of this company.
|
(b)
|
Credit Risk
|
|
|
|
|
|
Financial instruments that potentially subject the
Company to a significant concentration of credit risk consist primarily of
cash and cash equivalents and pledged deposits. As of December 31, 2016
and March 31, 2017, substantially all of the Companys cash and cash
equivalents were held by major financial institutions located in the PRC,
which management believes are of high credit quality.
|
|
|
|
|
|
For the credit risk related to trade accounts receivable,
the Company performs ongoing credit evaluations of its customers and, if
necessary, maintains reserves for potential credit losses. Historically,
such losses have been within managements
expectations.
|
F-23
CBAK Energy Technology, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended March 31, 2016 and 2017
(Unaudited)
(In US$ except for number of shares)
21.
|
Segment Information
|
|
|
|
The Company used to engage in one business segment, the
manufacture, commercialization and distribution of a wide variety of
standard and customized lithium ion rechargeable batteries for use in a
wide array of applications. The Company manufactured five types of Li-ion
rechargeable batteries: aluminum-case cell, battery pack, cylindrical
cell, lithium polymer cell and high-power lithium battery cell. The
Companys products are sold to packing plants operated by third parties
primarily for use in mobile phones and other electronic devices.
|
|
|
|
After the disposal of BAK International and its
subsidiaries (see Note 1), the Company focused on producing high-power
lithium battery cells. Net revenues for the three months ended March 31,
2016 and 2017 were as follows:
|
|
|
|
Net revenues by
product:
|
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
High power lithium batteries
used in:
|
|
|
|
|
|
|
|
Electric vehicles
|
$
|
2,742,955
|
|
$
|
3,257,772
|
|
|
Light electric vehicles
|
|
53,367
|
|
|
141,360
|
|
|
Uninterruptable supplies
|
|
402,591
|
|
|
317,012
|
|
|
|
$
|
3,198,913
|
|
$
|
3,716,144
|
|
Net revenues by geographic area:
|
|
|
Three months ended March 31,
|
|
|
|
|
2016
|
|
|
2017
|
|
|
PRC Mainland
|
$
|
2,771,540
|
|
$
|
3,407,323
|
|
|
Europe
|
|
251,206
|
|
|
121,468
|
|
|
PRC Taiwan
|
|
176,058
|
|
|
84,811
|
|
|
Israel
|
|
-
|
|
|
102,542
|
|
|
Others
|
|
109
|
|
|
-
|
|
|
|
$
|
3,198,913
|
|
$
|
3,716,144
|
|
F-24
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
|
The following managements discussion and analysis should be
read in conjunction with our financial statements and the notes thereto and the
other financial information appearing elsewhere in this report. Our financial
statements are prepared in U.S. dollars and in accordance with U.S. GAAP.
Special Note Regarding Forward Looking Statements
In addition to historical information, this transition report
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. We use words such as believe, expect, anticipate,
project, target, plan, optimistic, intend, aim, will or similar
expressions which are intended to identify forward-looking statements. Such
statements include, among others, those concerning market and industry segment
growth and demand and acceptance of new and existing products; any projections
of sales, earnings, revenue, margins or other financial items; any statements of
the plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; as well as all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those identified in Item 1A, Risk Factors described in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2016, as well as assumptions,
which, if they were to ever materialize or prove incorrect, could cause the
results of the Company to differ materially from those expressed or implied by
such forward-looking statements.
Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context and for the
purposes of this report only, references in this report to:
|
|
Company, we, us and our are to the combined
business of CBAK Energy Technology, Inc., a Nevada corporation, and its
consolidated subsidiaries;
|
|
|
|
|
|
BAK Asia are to our Hong Kong subsidiary, China BAK
Asia Holdings Limited;
|
|
|
|
|
|
CBAK Trading are to our PRC subsidiary, Dalian CBAK
Trading Co., Ltd.;
|
|
|
|
|
|
CBAK Power are to our PRC subsidiary, Dalian CBAK Power
Battery Co., Ltd;
|
|
|
|
|
|
China and PRC are to the Peoples Republic of China;
|
|
|
|
|
|
RMB are to Renminbi, the legal currency of China;
|
|
|
|
|
|
U.S. dollar, $ and US$ are to the legal currency of
the United States;
|
|
|
|
|
|
SEC are to the United States Securities and Exchange
Commission;
|
|
|
|
|
|
Securities Act are to the Securities Act of 1933, as
amended; and
|
|
|
|
|
|
Exchange Act are to the Securities Exchange Act of
1934, as amended.
|
On January 10, 2017, CBAK Energy Technology, Inc. (formerly
China BAK Battery, Inc.) (the "Company") filed Articles of Merger with the
Secretary of State of Nevada to effectuate a merger between the Company and the
Companys newly formed, wholly owned subsidiary, CBAK Merger Sub, Inc. (the
Merger Sub). According to the Articles of Merger, effective January 16, 2017,
the Merger Sub merged with and into the Company with the Company being the
surviving entity (the "Merger").
1
As permitted by Chapter 92A.180 of Nevada Revised Statutes, the
sole purpose of the Merger was to effect a change of the Company's name. Upon
the effectiveness of the filing of Articles of Merger with the Secretary of
State of Nevada, which is January 16, 2017, the Company's Articles of
Incorporation were deemed amended to reflect the change in the Company's
corporate name.
On March 7, 2017, the names of our subsidiaries Dalian BAK
Power Battery Co., Ltd and Dalian BAK Trading Co., Ltd., were changed to Dalian
CBAK Power Battery Co., Ltd and Dalian CBAK Trading Co., Ltd respectively.
Overview
Our Dalian manufacturing facilities began its partial
commercial operations in July 2015. We are now engaged in the business of
developing, manufacturing and selling new energy high power lithium batteries,
which are mainly used in the following applications:
|
|
Electric vehicles (EV), such as electric
cars, electric buses, hybrid electric cars and buses;
|
|
|
Light electric vehicles (LEV), such as
electric bicycles, electric motors, sight-seeing cars; and
|
|
|
Electric tools, energy storage, uninterruptible
power supply, and other high power applications.
|
We have received most of the operating assets, including
customers, employees, patents and technologies of our former subsidiary, BAK
International (Tianjin) Ltd. (BAK Tianjin). Such assets were acquired in
exchange for a reduction in receivables from our former subsidiaries that were
disposed in June 2014. We have outsourced and will continue to outsource our
production to other manufacturers until our Dalian manufacturing facility can
fulfill our customers needs, if necessary.
We generated revenues of $3.7 million and $3.2 million for the
three months ended March 31, 2017 and 2016, respectively. We had a net loss of
$2.1 million and $1.9 million in the three months ended March 31, 2017 and 2016
respectively. As of March 31, 2017, we had an accumulated deficit of $144.1
million and net assets of $10.8 million. We had a working capital deficiency and
accumulated deficit from recurring net losses and short-term debt obligations
maturing in less than one year as of March 31, 2017.
On June 14, 2016, we renewed our banking facilities from Bank
of Dandong for loans with a maximum amount of RMB130 million (approximately
$18.9 million), including three-year long-term loans and three-year revolving
bank acceptance and letters of credit bills for the period from June 13, 2016 to
June 12, 2019. The banking facilities were guaranteed by Mr. Yunfei Li (Mr.
Li), our CEO, and Ms. Qinghui Yuan, Mr. Lis wife, Mr. Xianqian Li, our former
CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, Shenzhen BAK Battery Co., Ltd.,
our former subsidiary (Shenzhen BAK). The facilities were also secured by part
of our Dalian sites prepaid land use rights, buildings, construction in
progress, machinery and equipment and pledged deposits. Under the banking
facilities, as of March 31, 2017, we borrowed various three-year term bank loans
that totaled RMB126.8 million (approximately $18.4 million), bearing fixed
interest at 7.2% per annum. We also borrowed a series of revolving bank
acceptance totaled $0.1 million from Bank of Dandong under the credit
facilities, and bank deposit of 50% was required to secure against these bank
acceptance bills.
On July 6, 2016, we obtained banking facilities from Bank of
Dalian for loans with a maximum amount of RMB10 million (approximately $1.5
million) and bank acceptance bills of RMB40 million (approximately $5.8 million)
to July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, and Ms. Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK. Under the banking facilities, on
July 6, 2016 we borrowed one year short-term loan of RMB10 million
(approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum.
We also borrowed revolving bank acceptance totaled $5.8 million, and bank
deposit of 50% was required to secure against these bank acceptance bills.
As of March 31, 2017, we had unutilized committed banking
facilities of $0.4 million. We plan to renew these loans upon maturity, and
intend to raise additional funds through bank borrowings and equity financing in
the future to meet our daily cash demands, if required.
In June 2016, we received advances in the aggregate of $2.9
million from Mr. Jiping Zhou and Mr. Dawei Li. These advances were unsecured,
non-interest bearing and repayable on demand. On July 8, 2016, we received
further advances of $2.6 million from Mr. Jiping Zhou. On July 28, 2016, to
convert these advances into equity interests in our Company, we entered into
securities purchase agreements with Mr. Jiping Zhou and Mr. Dawei Li to issue
and sell an aggregate of 2,206,640 shares of our common stock, at $2.5 per
share, for an aggregate consideration of approximately $5.52 million. On August
17, 2016, we issued these shares to the investors.
2
On February 17, 2017, we signed a letter of understanding with
each of eight individual investors, who are also our current shareholders,
including our CEO, Mr. Yunfei Li, whereby these shareholders agreed in principle
to subscribe for new shares of our common stock totaling $10 million, but the
purchase price was not determined at the time of the letter. Each of the
shareholders is expected to enter into a definitive securities purchase
agreement with us within the next few months under which the purchase price of
shares will be determined based on the market price at the closing of such
purchase. In January 2017, the shareholders paid us a total of $2.03 million as
refundable deposits, among which, Mr. Yunfei Li agreed to subscribe new shares
totaling $1.12 million and pay a refundable deposit of $0.2 million. The
issuance of the shares to the investors is expected to be made in reliance on
the exemption provided by Section 4(a)(2) of the Securities Act of 1933, as
amended, for the offer and sale of securities not involving a public offering,
and Regulation S promulgated thereunder. In April and May 2017, we received cash
of $9.6 million from these shareholders. As of the approval date of this
quarterly report, no definitive securities purchase agreements have been signed
and the share purchase is not completed.
In the meanwhile, due to the growing environmental pollution
problem, the Chinese government is currently providing vigorous support to the
new energy facilities and vehicles. It is expected that we will be able to
secure more potential orders from the new energy market, especially from the
electric car market. We believe with that the booming market demand in high
power lithium ion products, we can continue as a going concern and return to
profitability.
To promote the development of new energy electric vehicles, in
April 2015, the central government of China issued Notice of Financial Support
Policies for the Promotion of New Energy Vehicles in 2016-2020, which regulated
favorable government subsidies for the new energy electric vehicles for years
from 2016 to 2020. It led to the explosive growth in the production and selling
of new electric vehicles in 2015. However, in January 2016, as it was reported
that there were widespread frauds involved in obtaining government subsidies,
the central government launched investigations among the electric vehicles
industry. Before the completion of the investigation, the subsidies for 2015
were ceased to be granted to the manufacturers of electric vehicles, and it was
said that the subsidies policy for 2016 to 2020 would be revised accordingly.
Due to the continued investigation and unclear government policies, almost all
the new energy electric vehicle manufacturers suspended or decreased the
production and selling of electric vehicles in 2016. Accordingly, the production
and selling of power batteries for use in electric vehicles dramatically
decreased in 2016. In November 2016 the central government announced the result
of investigation, including the list of manufacturers of electric vehicles who
committed alleged frauds and the related penalties. On December 29, 2016, the
Ministry of Finance of China finally issued the revised subsidy policy named
Notice of Revision to Financial Support Policies for the Promotion of New Energy
Vehicles in 2016-2020, which revised the subsidies standard to be based on cost
and technology of the power batteries, and set up the maximum amount of the
subsidies from the central and local governments. The revised subsidy policy
also raised the standard and threshold for the quality of electric vehicles and
power batteries, confirmed the responsibility of the manufacturers of electric
vehicles, and strengthened the penalty system.
In March 2015, the Ministry of Industry and Information
Technology of China (the MIIT) issued the Requirements of the Industry
Standards for the Auto Power Storage Batteries ("Requirements"), which are
applicable to auto power battery manufacturers located in China. In order to be
certified as qualified manufacturers under Requirements, manufacturers are
required to be examined by quality inspecting agencies appointed by
Administration of Quality Inspection under Requirements after the manufacturers
have obtained the following reports and certificates:
1.
|
Environmental Acceptance Report;
|
2.
|
Fire Acceptance Report;
|
3.
|
New National Standard Certificate of Power Battery: GB/T
31484-2015, GB/T 31485-2015 and GB/T 31486-2015;
|
4.
|
OHSAS 18001 Occupational Health and Safety Management
System;
|
5.
|
ISO14001 Environmental Management System; and
|
6.
|
Occupational Health Report Occupational Health
Report.
|
We have obtained all the above listed required reports and
certificates. While we believe that we meet all of the conditions listed under
the Requirements, there is no assurance that the certification will be granted
to us by the MIIT. During the transition period in 2015 and the beginning of
2016, electric automobile manufacturers were able to obtain subsidies from the
governments even though their power battery suppliers were not as qualified
manufacturers under the Requirements. Subsequent to that period and prior to
obtaining the certification from the MIIT, we have been cooperating with
Shenzhen BAK, our former subsidiary, or other qualified companies under the
Requirements, by selling our key materials to those battery manufacturers for
them to manufacture, pack, test and use their own process produce and sell end
products in compliance with the Requirements to electric automobile
manufacturers. From September 2016, the MIIT ceased to certify auto power
battery manufacturers under the Requirements. Also it is reported that the
compliance with Requirements will not be deemed as a precondition for qualified
manufacturers of power batteries for use in electric vehicles. In the newly issued Notice of Revision to Financial Support Policies for the
Promotion of New Energy Vehicles in 2016-2020, compliance with the Requirements
was not listed as a precondition for qualified manufacturers of power batteries
to be used in electric vehicles to obtain government subsidies.
3
Financial Performance Highlights for the Quarter Ended March
31, 2017
The following are some financial highlights for the quarter
ended March 31, 2017:
|
|
Net revenues
: Net revenues increased by
$0.5 million, or 16.2%, to $3.7 million for the three months ended March
31, 2017, from $3.2 million for the same period in 2016.
|
|
|
|
|
|
Gross loss
: Gross loss was $0.4 million,
representing an increase of $0.3 million, for the three months ended March
31, 2017, from gross loss of $0.1 million for the same period in 2016.
|
|
|
|
|
|
Operating loss
: Operating loss was $2.1
million for the three months ended March 31, 2017, reflecting an increase
of $0.2 million from an operating loss of $1.9 million for the same period
in 2016.
|
|
|
|
|
|
Net loss:
Net loss was $2.1 million for the
three months ended March 31, 2017, representing an increase of $0.2
million from net loss of $1.9 million for the same period in 2016.
|
|
|
|
|
|
Fully diluted loss per share
: Fully diluted
loss per share was $0.10 for the three months ended March 31, 2017, as
compared to fully diluted loss per share of $0.11 for the same period in
2016.
|
Financial Statement Presentation
Net revenues.
Our net revenues represent the
invoiced value of our products sold, net of value added taxes, or VAT, sales
returns, trade discounts and allowances. We are subject to VAT, which is levied
on most of our products at the rate of 17% on the invoiced value of our
products. Provision for sales returns are recorded as a reduction of revenue in
the same period that revenue is recognized. The provision for sales returns
represents our best estimate of the amount of goods that will be returned from
our customers based on historical sales return data.
Pursuant to the Provisional Regulation of China on Value Added
Tax and its implementing rules, all entities and individuals that are engaged in
the sale of goods, the provision of repairs and replacement services and the
importation of goods in China are generally required to pay VAT at a rate of 17%
of the gross sales proceeds received, less any deductible VAT already paid or
borne by the taxpayer. Further, when exporting goods, the exporter is entitled
to some or all of the refund of VAT that it has already paid or borne. Our
imported raw materials that are used for manufacturing exported products and
deposited in bonded warehouses are exempt from import VAT.
Cost of revenues.
Cost of revenues consists
primarily of material costs, employee remuneration for staff engaged in
production activity, share-based compensation, depreciation and related expenses
that are directly attributable to the production of products. Cost of revenues
also includes write-downs of inventory to lower of cost and net realizable
value.
Research and development expenses.
Research and
development expenses primarily consist of remuneration for R&D staff,
share-based compensation, depreciation and maintenance expenses relating to
R&D equipment, and R&D material costs.
Sales and marketing expenses.
Sales and marketing
expenses consist primarily of remuneration for staff involved in selling and
marketing efforts, including staff engaged in the packaging of goods for
shipment, advertising cost, depreciation, share-based compensation, travel and
entertainment expenses and product warranty expense. We do not pay slotting fees
to retail companies for displaying our products, engage in cooperative
advertising programs, participate in buy-down programs or similar arrangements.
General and administrative expenses.
General and
administrative expenses consist primarily of employee remuneration, share-based
compensation, professional fees, insurance, benefits, general office expenses,
depreciation and liquidated damage charges.
Government grant income.
We present the
government subsidies received as income unless the subsidies received are
earmarked to compensate a specific expense, which have been accounted for by
offsetting the specific expense, such as research and development expense,
interest expenses and removal costs. Unearned government subsidies received are
deferred for recognition until the criteria for such recognition could be met.
Grants applicable to land are amortized over the life of the depreciable facilities constructed on it. For
research and development expenses, we match and offset the government grants
with the expenses of the research and development activities as specified in the
grant approval document in the corresponding period when such expenses are
incurred.
4
Finance costs, net.
Finance costs consist
primarily of interest income and interest on bank loans, net of capitalized
interest.
Income tax expenses.
Our subsidiaries in PRC are
subject to income tax at a rate of 25%. Our Hong Kong subsidiary BAK Asia is
subject to a profits tax at a rate of 16.5% . However, because we did not have
any assessable income derived from or arising in the region, the entity had not
paid any such tax.
Results of Operations
Comparison of Three Months Ended March 31, 2017 and
2016
The following tables set forth key components of our results of
operations for the periods indicated, both in dollars and as a percentage of net
revenues.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Three months ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
Net revenues
|
$
|
3,199
|
|
$
|
3,716
|
|
|
517
|
|
|
16.16
|
|
Cost of revenues
|
|
(3,298
|
)
|
|
(4,133
|
)
|
|
(835
|
)
|
|
(25.32
|
)
|
Gross loss
|
|
(99
|
)
|
|
(417
|
)
|
|
(318
|
)
|
|
(321.21
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expenses
|
|
361
|
|
|
430
|
|
|
69
|
|
|
19.11
|
|
Sales and marketing expenses
|
|
299
|
|
|
235
|
|
|
(64
|
)
|
|
(21.40
|
)
|
General and administrative
expenses
|
|
1,171
|
|
|
984
|
|
|
(187
|
)
|
|
(15.97
|
)
|
Total operating expenses
|
|
1,831
|
|
|
1,649
|
|
|
(182
|
)
|
|
(9.94
|
)
|
Operating loss
|
|
(1,930
|
)
|
|
(2,066
|
)
|
|
(136
|
)
|
|
(7.05
|
)
|
Finance income, net
|
|
(37
|
)
|
|
(3
|
)
|
|
34
|
|
|
91.89
|
|
Other income, net
|
|
7
|
|
|
1
|
|
|
(6
|
)
|
|
(85.71
|
)
|
Loss before income tax
|
|
(1,960
|
)
|
|
(2,068
|
)
|
|
(108
|
)
|
|
(5.51
|
)
|
Income tax credit
|
|
57
|
|
|
-
|
|
|
(57
|
)
|
|
(100.00
|
)
|
Net loss
|
|
(1,903
|
)
|
|
(2,068
|
)
|
|
(165
|
)
|
|
(8.67
|
)
|
Net revenues
. Net revenues were $3.7 million for
the three months ended March 31, 2017, as compared to $3.2 million for the same
period in 2016, representing an increase of $0.5 million, or 16.2% .
The following table sets forth the breakdown of our net
revenues by end-product applications derived from high-power lithium batteries.
(All amounts in thousands of U.S. dollars other than
percentages)
|
|
Three months ended March 31,
|
|
|
Change
|
|
|
|
2016
|
|
|
2017
|
|
|
$
|
|
|
%
|
|
High power lithium batteries used in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric
vehicles
|
$
|
2,743
|
|
$
|
3,258
|
|
|
515
|
|
|
18.78
|
|
Light electric vehicles
|
|
53
|
|
|
141
|
|
|
88
|
|
|
166.04
|
|
Uninterruptable
supplies
|
|
403
|
|
|
317
|
|
|
(86
|
)
|
|
(21.34
|
)
|
|
$
|
3,199
|
|
$
|
3,716
|
|
|
517
|
|
|
16.16
|
|
Net revenues from sales of batteries for electric vehicles were
$3.3 million for the three months ended March 31, 2017 as compared to $2.7
million in the same period of 2016. Since the announcement of government subsidy
policy for electric vehicle manufactures issued at the end of calendar year
2016, we received more orders from electric vehicle manufacturers in year 2017.
5
Net revenues from sales of batteries for light electric
vehicles was $0.1 million for the three months ended March 31, 2017, compared to
approximately $53,000 in the same period of 2016, representing an increase of
$88,000, or 166.0% . This change resulted from an increase of 224.0% in units
sold. From this year, we implement an expansion in sales of light electric
vehicles batteries to increase our sales.
Net revenues from sales of batteries for uninterruptable power
supplies was $0.3 million in the three months ended March 31, 2017, as compared
with $0.4 million in the same period in 2016, representing a decrease of
$86,000, or 21.3% . As we focused more on electric vehicle and light electric
vehicle market in 2017, sale of batteries for uninterruptable power supplies
decreased.
Cost of revenues.
Cost of revenues increased to
$4.1 million for the three months ended March 31, 2017, as compared to $3.3
million for the same period in 2016, an increase of $0.8 million, or 25.3% .
Included in cost of revenues were write down of obsolete inventories of $150,156
for three months ended March 31, 2017, while it was $96,910 for the same period
in 2016. We write down the inventory value whenever there is an indication that
it is impaired. However, further write-down may be necessary if market
conditions continue to deteriorate.
Gross loss.
Gross loss for the three months ended
March 31, 2017 was $0.4 million, or 11.2% of net revenues as compared to gross
loss of $99,000, or 3.1% of net revenues, for the same period in 2016. Our new
Dalian facilities commenced manufacturing activities in July 2015. Inefficiency
was inevitably caused by the operation of the newly installed machinery and
newly hired production staff. In particular, we need to maintain a high level of
skilled production staff, in anticipation of the increased demand for our
products following the release of the government subsidy policy of new energy
vehicles in 2017. As a result, we incurred a gross loss in the quarter ended
March 31, 2017.
Research and development expenses
. Research and
development expenses increased to approximately $430,000 for the three months
ended March 31, 2017, as compared to approximately $361,000 for the same period
in 2016, an increase of $69,000, or 19.1% . The increase was primarily resulted
from the salary and wages increased by approximately $57,000 and the materials
and consumable expenses increased by approximately $38,000. We expanded our
research and development team to improve our product to fulfill our customers
requirements and expand our market shares. We have 87 research and development
employees as of March 31, 2017 as compared to a headcount of 62 as of March 31,
2016.
Sales and marketing expenses
. Sales and marketing
expenses decreased to approximately $235,000 for the three months ended March
31, 2017, as compared to approximately $299,000 for the same period in 2016, a
decrease of approximately $64,000, or 21.4% . The decrease was mainly resulted
from a decrease of approximately $37,000 in travelling and transportation expenses.
General and administrative expenses
. General and
administrative expenses decreased to $1.0 million, or 26.5% of revenues, for the
three months ended March 31, 2017, as compared to $1.2 million, or 36.6% of
revenues, for the same period in 2016, a decrease of $0.2 million, or 16.0% .
The decrease in general and administrative expenses was mainly because the
Company tightened cost control and resulted in lesser amount of G&A expenses
in 2017. Salary and wages (including share-based compensation expense) decreased
by approximately $228,000 in the quarter ended March 31, 2017, as compared to
the same quarter in prior year.
Operating loss
. As a result of the above, our
operating loss totaled $2.1 million for the three months ended March 31, 2017,
as compared to $1.9 million for the same period in 2016, representing an
increase of $0.1 million, or 7.1% .
Income tax credit.
Income tax credit was nil for
the three months ended March 31, 2017 as compared to $57,241 for the same period
in 2016.
Net loss.
As a result of the foregoing, we had a
net loss of $2.1 million for the three months ended March 31, 2017, compared to
net loss of $1.9 million for the same period in 2016.
Liquidity and Capital Resources
We have financed our liquidity requirements from short-term
bank loans and bills payable under bank credit agreements and issuance of
capital stock.
6
We incurred a net loss of $2.1 million for the three months
ended March 31, 2017. As of March 31, 2017, we had cash and cash equivalents of
$0.4 million. Our total current assets were $35.2 million and our total current
liabilities were $57.0 million, resulting in a net working capital deficiency of
$21.8 million. These factors raise substantial doubts about our ability to
continue as a going concern.
In June 2016, we received advances in the aggregate of $2.9
million from Mr. Jiping Zhou and Mr. Dawei Li. These advances were unsecured,
non-interest bearing and repayable on demand. On July 8, 2016, we received
further advances of $2.6 million from Mr. Jiping Zhou. On July 28, 2016, to
convert these advances into equity interests in our Company, we entered into
securities purchase agreements with Mr. Jiping Zhou and Mr. Dawei Li to issue
and sell an aggregate of 2,206,640 shares of our common stock, at $2.5 per
share, for an aggregate consideration of approximately $5.52 million. On August
17, 2016, we issued these shares to the investors.
On February 17, 2017, we signed a letter of understanding with
each of eight individual investors, who are also our current shareholders,
including our CEO, Mr. Yunfei Li, whereby these shareholders agreed in principle
to subscribe for new shares of our common stock totaling $10 million, but the
purchase price was not determined at the time of the letter. Each of the
shareholders is expected to enter into a definitive securities purchase
agreement with us within the next few months under which the purchase price of
shares will be determined based on the market price at the closing of such
purchase. In January 2017, the shareholders paid us a total of $2.03 million as
refundable deposits, among which, Mr. Yunfei Li agreed to subscribe new shares
totaling $1.12 million and pay a deposit of approximately $225,784. The issuance
of the shares to the investors is expected to be made in reliance on the
exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended,
for the offer and sale of securities not involving a public offering, and
Regulation S promulgated thereunder. In April and May 2017, we received cash of
$9.6 million from these shareholders. As of the approval date of this quarterly
report, no definitive securities purchase agreements have been signed and the
share purchase is not completed.
On June 14, 2016, we renewed our banking facilities from Bank
of Dandong for loans with a maximum amount of RMB130 million (approximately
$18.9 million), including three-year long-term loans and three-year revolving
bank acceptance and letters of credit bills for the period from June 13, 2016 to
June 12, 2019. The banking facilities were guaranteed by Mr. Yunfei Li (Mr.
Li), our CEO, and Ms. Qinghui Yuan, Mr. Lis wife, Mr. Xianqian Li, our former
CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, Shenzhen BAK Battery Co., Ltd.,
our former subsidiary (Shenzhen BAK). The facilities were also secured by part
of our Dalian sites prepaid land use rights, buildings, construction in
progress, machinery and equipment and pledged deposits. Under the banking
facilities, as of March 31, 2017, we borrowed various three-year term bank loans
that totaled RMB126.8 million (approximately $18.4 million), bearing fixed
interest at 7.2% per annum. We also borrowed a series of revolving bank
acceptance totaled $0.1 million from Bank of Dandong under the credit
facilities, and bank deposit of 50% was required to secure against these bank
acceptance bills.
On July 6, 2016, we obtained banking facilities from Bank of
Dalian for loans with a maximum amount of RMB10 million (approximately $1.5
million) and bank acceptance bills of RMB40 million (approximately $5.8 million)
to July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, and Ms. Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK. Under the banking facilities, on
July 6, 2016 we borrowed one year short-term loan of RMB10 million
(approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum.
We also borrowed revolving bank acceptance totaled $5.8 million, and bank
deposit of 50% was required to secure against these bank acceptance bills.
As of March 31, 2017, we had unutilized committed banking
facilities of $0.4 million.
We are currently expanding our product lines and manufacturing
capacity in our Dalian plant, which require more funding to finance the
expansion. We may also require additional cash due to changing business
conditions or other future developments, including any investments or
acquisitions we may decide to pursue. We plan to renew these loans upon
maturity, if required, and plan to raise additional funds through bank
borrowings and equity financing in the future to meet our daily cash demands, if
required. However, there can be no assurance that we will be successful in
obtaining this financing. If our existing cash and bank borrowing are
insufficient to meet our requirements, we may seek to sell equity securities,
debt securities or borrow from lending institutions. We can make no assurance
that financing will be available in the amounts we need or on terms acceptable
to us, if at all. The sale of equity securities, including convertible debt
securities, would dilute the interests of our current shareholders. The
incurrence of debt would divert cash for working capital and capital
expenditures to service debt obligations and could result in operating and
financial covenants that restrict our operations and our ability to pay
dividends to our shareholders. If we are unable to obtain additional equity or
debt financing as required, our business operations and prospects may suffer.
7
In the meanwhile, due to the growing environmental pollution
problem, the Chinese government is currently providing vigorous support to the
new energy facilities and vehicle. It is expected that we will be able to secure
more potential orders from the new energy market, especially from the electric
car market. We believe with that the booming future market demand in high power
lithium ion products, we can continue as a going concern and return to
profitability.
The accompanying condensed consolidated financial statements
have been prepared assuming we will continue to operate as a going concern,
which contemplates the realization of assets and the settlement of liabilities
in the normal course of business. The condensed consolidated financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty related to our ability to continue as a going concern.
The following table sets forth a summary of our cash flows for
the periods indicated:
(All amounts in thousands of U.S. dollars)
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2017
|
|
Net cash provided by (used
in) operating activities
|
$
|
3,375
|
|
$
|
(4,319
|
)
|
Net cash used in investing activities
|
|
(2,936
|
)
|
|
(1,079
|
)
|
Net cash provided by
financing activities
|
|
1,023
|
|
|
5,426
|
|
Effect of exchange rate changes on cash and
cash equivalents
|
|
52
|
|
|
3
|
|
Net increase in cash and cash
equivalents
|
|
1,514
|
|
|
31
|
|
Cash and cash equivalents at the beginning of
period
|
|
81
|
|
|
409
|
|
Cash and cash equivalents at
the end of period
|
$
|
1,595
|
|
$
|
440
|
|
Operating Activities
Net cash used in operating activities was $4.3 million in the
three months ended March 31, 2017, as compared to net cash provided by operating
activities of $3.4 million in the same period in 2016. The increase in operating
cash outflow of approximately $7.7 million was mainly attributable increasing
cash outflows of $3.7 million on trade accounts and bills payable, $1.4 million
on trade accounts and bills receivable and $0.6 million on income taxes payable,
and a decreasing cash inflow of $2.0 million on trade balances with our former
subsidiaries.
Investing Activities
Net cash used in investing activities was $1.1 million for the
three months ended March 31, 2017, as compared to $2.9 million in the same
period of 2016. The net cash used in investing activities in the three months
ended March 31, 2017 mainly comprised cash payment of $1.2 million on
acquisition of property, plant and equipment and construction in progress.
Financing Activities
Net cash provided by financing activities was $5.4 million in
the three months ended March 31, 2017, compared to $1.0 million during the same
period in 2016. The net cash provided by financing activities in the three
months ended March 31, 2017 was mainly deposits received from shareholders of
$2.0 million and new short term advances from related and unrelated parties
totaled $3.4 million in the three months ended March 31, 2017.
As of March 31, 2017, the principal amounts outstanding under
our credit facilities and lines of credit were as follows:
(All amounts in thousands of U.S. dollars)
|
|
Maximum amount available
|
|
|
Amount borrowed
|
|
Long-term credit facilities:
|
|
|
|
|
|
|
Bank of Dandong
|
$
|
18,768
|
|
$
|
18,407
|
|
|
|
|
|
|
|
|
Short-term credit
facilities:
|
|
|
|
|
|
|
Bank of Dandong
|
|
104
|
|
|
104
|
|
Bank of Dalian
|
|
7,258
|
|
|
7,258
|
|
|
|
7,362
|
|
|
7,362
|
|
Total
|
$
|
26,130
|
|
$
|
25,769
|
|
8
Capital Expenditures
We incurred capital expenditures of $1.2 million and $3.0
million in the three months ended March 31, 2017 and 2016, respectively. Our
capital expenditures were used primarily to construct our manufacturing
facilities in Dalian.
We estimate that our total capital expenditures for the year
ending March 31, 2017 will reach approximately $35.3 million. Such funds will be
used to construct new plants and expand new automatic manufacturing lines to
fulfill our customer demands.
Contractual Obligations and Commercial
Commitments
The following table sets forth our contractual obligations and
commercial commitments as of March 31, 2017:
(All amounts in thousands of U.S. dollars)
|
|
Payments
Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1 - 3 years
|
|
|
3 - 5 years
|
|
|
5 years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term bank loans
|
$
|
1,452
|
|
$
|
1,452
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Long-term bank loans
|
|
18,407
|
|
|
-
|
|
|
18,407
|
|
|
-
|
|
|
-
|
|
Bills payables
|
|
6,307
|
|
|
6,307
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payable to former
subsidiaries
|
|
5,308
|
|
|
5,308
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Other short-term loans
|
|
16,036
|
|
|
16,036
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital injection to Dalian
Power and Trading
|
|
9,896
|
|
|
9,896
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments for construction of
buildings
|
|
2,301
|
|
|
2,301
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments for
purchase of equipment
|
|
230
|
|
|
230
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Future interest payment on bank loans
|
|
2,981
|
|
|
1,350
|
|
|
1,631
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
62,918
|
|
$
|
42,880
|
|
$
|
20,038
|
|
$
|
-
|
|
$
|
-
|
|
Other than the contractual obligations and commercial
commitments set forth above, we did not have any other long-term debt
obligations, operating lease obligations, capital commitments, purchase
obligations or other long-term liabilities as of March 31, 2017.
Off-Balance Sheet Transactions
We have not entered into any transactions, agreements or other
contractual arrangements to which an entity unconsolidated with us is a party
and under which we have (i) any obligation under a guarantee, (ii) any retained
or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity, (iii) any
obligation under derivative instruments that are indexed to our shares and
classified as shareholders equity in our consolidated balance sheets, or (iv)
any obligation arising out of a variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
Critical Accounting Policies
Our condensed consolidated financial information has been
prepared in accordance with U.S. GAAP, which requires us to make judgments,
estimates and assumptions that affect (1) the reported amounts of our assets and
liabilities, (2) the disclosure of our contingent assets and liabilities at the
end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate
these estimates based on our own historical experience, knowledge and assessment
of current business and other conditions, our expectations regarding the future
based on available information and reasonable assumptions, which together form
our basis for making judgments about matters that are not readily apparent from
other sources. Since the use of estimates is an integral component of the
financial reporting process, our actual results could differ from those
estimates. Some of our accounting policies require a higher degree of judgment
than others in their application. There have been no material changes to the
critical accounting policies previously disclosed in our Annual Report on Form
10-K for the fiscal year ended September 30, 2016.
9
Changes in Accounting Standards
Please refer to note 1 to our condensed consolidated financial
statements, Principal Activities, Basis of Presentation and Organization
Recently Issued Accounting Standards, for a discussion of relevant
pronouncements.